U.S. medical office market fundamentals have been resilient in 2019, reported CBRE. Demographic and healthcare industry trends are firmly entrenched and forecast to persist, supporting long-term demand for medical office space.
The U.S. medical office vacancy rate remained at 10.3 percent through midyear 2019 –– its lowest level of the expansion –– and average asking rents stayed near record levels.
Rent growth fell to 1.8 percent year-over-year in the second quarter 2019, down from the five-year average of 2.6 percent, as net absorption has softened since mid-2017.
Top-tier domestic institutional and foreign capital, as well as REITs, have fueled demand for medical office properties. Although medical office investment volume is down from 2018, pricing remains strong.
CBRE’s report cites several factors behind the continued popularity of medical office, including a steady vacancy rate at 10.3 percent despite a 10-year high in construction completions in the second quarter, a sustained increase in average asking rents since 2013, and strong demand for health-care services due to an aging population and other demographic trends.
As a result, transaction volume for medical office buildings stands 50 percent higher this year than before the recession, though it has receded from its early-2018 peak. Foreign investors, domestic institutions and real estate investment trusts are steadily getting more active the medical office market. Cap rates – a measure of a property’s income as a percentage of its price - for medical offices have pulled even with those of conventional offices after years of registering higher.
“There is a continued rush by capital to this property sector,” said Ian Anderson, CBRE head of Americas Office Research. “This is a generational, secular trend driving interest in this type of real estate. The median age of the American population is gradually increasing, and health care as an industry is moving more toward treatment at outpatient centers and medical offices than at hospitals.”
“Multiple indicators – economic and otherwise – point to continued healthy growth for this sector,” said Christopher Bodnar, CBRE vice chairman of investment properties, U.S. Healthcare Capital Markets. “Americans’ health-care spending has increased exponentially in the past 20 years to an unsustainable rate. As such, the healthcare industry and consumers continue to move toward outpatient treatment to help drive down costs. These are long-term, fundamental shifts that attract institutional investors to medical office.”
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