The medical office sector is likely to see fundamentals remain strong in 2023, although the broader economic challenges may pose some threats to the healthcare industry, according to Kevin Yen, principal, investments, with BentallGreenOak.

“Major health systems are battling rising operating costs, while revenue, primarily from the private insurance-driven model, is growing at a much slower pace,” says Yen. “This is unlikely to significantly change health systems’ credit ratings but could shift the way they view real estate operation and expansion. From an institutional investment perspective, investors will also be more focused on the specific uses in a medical office asset before making investment decisions.”

Yen adds these factors are likely to negatively impact medical office transaction volume in 2023. “That said, the medical office fundamentals will remain strong given lack of new supply and growing demand for the services provided by medical tenants,” he says.

According to Yen, health systems’ main revenue-generating business has been and will continue to be off-campus, electives-oriented services. “As health systems continue their focus on generating top-line revenues, the medical office market will likely see built-to-suit opportunities for both major health systems and strong private physician groups in high population growth locations.”

Regarding sales activity, Yen predicts fewer portfolio transactions and more single-asset transactions in the year ahead. “In an increasing interest rate environment, bigger is not always better. Institutional investors will be more focused on high-quality physical assets and credit tenant profile, and less on scale in the near term,” says Yen.

He adds, “Medical office buildings’ asset performances are expected to remain stable from both the occupancy and collection perspective.”

Yen also predicts institutional investors will focus on metro areas with high population growth, as well as the largest 25 to 50 metro areas in the nation.

“That decision will be driven more by macro investment strategies,” says Yen, “and less by medical office asset performances.”

Loretta Clodfelter is senior editor of Institutional Real Estate Americas.