Why medical office buildings are so popular with investors

In 2017, MOB sales hit a record value of $10.4 billion—and the momentum is continuing.

In February 2018, a 17-building, 1.4 million-square-foot portfolio traded hands in a transaction that spanned several states; evidence of continued demand for large-scale acquisitions even after a banner year. There were 19 big MOB portfolio sales in 2017, compared to 12 portfolios in 2016.

Mindy Berman, from JLL Capital Markets, Healthcare says it’s easy to see why investors are hungry for the sector.

“Since 2009, the medical office building sector has been the picture of stability,” she says. “MOBs are exhibiting the kind of durable income that appeals to many investors.”

The nation’s older population is growing quickly. Estimates in a recent JLL report suggest the number of Americans at or over the age of 65 will almost double over the next three decades, from 48 million to nearly 88 million in 2050. The number of people who are 80-and-up is on pace to triple, and the number of 90-and-up folks will quadruple in the same time frame, as people live longer.

The rise of this group will come with a great demand for more medical care.

“Generally speaking, older people require more frequent medical care than younger people,” says Berman.

Nearly three-quarters of the nation’s healthcare spending already comes from the over-50 set, according to JLL research, and with the growing elderly population, that piece of the pie is likely to increase. Demand for quality space to meet those needs will also increase over time.

Locations away from hospital  campuses – ‘off-campus’ – accounted for the lion’s share of MOB construction in 2017—70 percent, according to JLL research.

Behind this construction momentum is a larger strategic shift toward locations closer to where patients live and work.

Over the last decade, health system leaders have found they can serve more patients, and do so more efficiently and effectively, when they expand care offerings outside the traditional hospital setting, from micro-hospitals in less populated areas, to clinics in suburban shopping centers. The expansion into previously unserved areas has fueled steady demand for MOBs since 2009.

That demand is only expected to continue its steady climb, says Berman, as older patients often seek care in outpatient facilities within their own communities.

“Even when hospitals are nearby, they are often big, confusing, challenging to navigate and lack convenient parking,” she says.

And it’s not just for seniors.

“All patients are moving away from the idea that they have to go the hospital for everything,” says Berman.

Unlike some other real estate investment classes, MOBs have demonstrated uniquely stable long-term occupancy rates.

The quarterly weighted average occupancy wavered a scant 200 basis points from peak to trough between 2009 (90.4 percent in Q1) and 2016 (92.6 percent in Q4), according to Revista data. This track record of stability combined with increasing patient populations means occupancy rates should remain steady in the near future.

One factor behind this stability is the length of the leases. The cost of the build-out for the typical medical user – with surgery rooms, doctor’s offices and screening centers – greatly exceeds that of a traditional office tenant. Because of this, medical tenants typically sign longer lease terms.

Pricing performance is strong, too. MOB sales prices have trended steadily upward over the last decade. They even showed a relative resistance to the market downturns seen during the Great Recession.

Today, the dollar-value-per-square-foot is at peak levels after shooting up by 49.8 percent in the last five years.

What’s driving the upward trend in pricing? Berman points to increasing investor interest in MOBs as an alternative asset classat a time when investors are looking outside of the office sector.

“When you can diversify, but diversify into a stable product type, it’s a win-win,” she says.

Finally, unlike many other property types, the construction pipeline is in close alignment with demand. Overall, more than 34 million square feet of MOBs and other outpatient space projects were started or completed in 2017, and barely any of it was spec development.

Thus, completions were largely in-step with absorption.

“The demand for space is tied to patients’ need for care, and is likely to remain strong regardless of the ups or downs of the economic cycle,” Berman says. “With low volatility and superior returns, MOBs are likely to remain a staple product in investors’ portfolios.”