Why Medical Office Buildings Continue to Show Value

Medical office buildings (MOB) were one of the most resilient CRE asset classes for the last few years due to their continuous demand despite a downturned market. In fact, according to the Q1 2024 report from RCA, MOB sales were the driving force behind the recent positive momentum in entity-level sales within the office sector.

Healthpeak Properties’ acquisition of a prominent MOB, Physicians Trust Realty, in March was a deal that single-handedly accounted for 34% of the office investment market for Q1 2024. Without this transaction, overall office market volume would have experienced a notable 16% decline.

Recent investor activity suggests that this boost in Q1 indicates a lack of investor interest in traditional office spaces, instead favoring niche strategies within the sector that target specific demographics, specifically MOBs. The portfolio sale during Q1 consisted primarily of medical laboratory-oriented office buildings.

Driving Force Behind MOB Demand

Technological advancements, demographic shifts, and changing consumer preferences are driving the ongoing transition to outpatient care, increasing the demand for MOBs. As an aging population that requires more medical attention, the 80+ age group is projected to expand by 50% in the next decade, leading to a substantial rise in outpatient visits and volume. Specifically, outpatient volume is anticipated to rise by 65%.

Per the Peterson-KFF health system tracker, individuals aged 65 and above comprise 18% of the population but contribute 36% of the total health expenditure. When including the 55 to 64 age group, these figures rise to 31% of the population and 55% of total health spending.

Emerging medical specialties, including endocrinology, are gaining prominence, focusing on lifelong well-being. Additionally, as patients live longer and more active lives, there has been a nearly 20% uptick in commercial claims for hip, knee, and shoulder replacements between 2022 and 2023. This indicates a rising demand for outpatient surgeries and subsequent rehabilitation services, with endocrinology following closely in demand.

Advancements in technology that facilitate early disease detection and less invasive treatments are further pushing oncology services out of traditional hospital settings and into outpatient environments. This trend involves establishing smaller cancer care centers near patients, often linked with ambulatory surgery centers or located within neighborhood hospitals.

Tech companies’ involvement in the healthcare sector also contributes to the growth of outpatient facilities. According to GlobeSt, OneMedical, a primary care provider owned by Amazon, allocates 60% of its locations to retail properties, 36% to traditional or medical office spaces, and 5% to ground-floor retail spaces within multifamily buildings. This strategy underscores the importance of convenience for healthcare consumers.

Investors should keep in mind that patients prioritize proximity and convenience, similar to retail settings. Consequently, older MOBs in areas with slower population growth may lose favor, prompting health systems to adjust their locations to serve their patient base better.

In order to remain competitive with these new entrants, health systems must prioritize convenience, especially for primary and urgent care services.

Stand Out Markets

Sunbelt markets, including Orlando, Austin, Raleigh-Durham, and Nashville, are experiencing significant population and job growth, fueling expansion in the healthcare sector. Among these, Austin will likely have the fastest expansion rate, while the Dallas-Fort Worth area will witness the largest volume growth in absolute terms.

In 2023, Los Angeles topped the country in MOB sales, with transactions totaling $571 million, closely followed by Washington, D.C., which saw $486 million in sales.

Medical Office Buildings at a Glance

• New Jersey’s MOB pipeline is the largest nationally, with 965,000 square feet under construction.
• Atlanta saw the fastest growth in MOBs among large markets, with a 20.8% increase between 2014 and 2023.
• The Eastpark Medical Center in Madison is the largest property set for delivery in 2024, spanning 469,000 square feet.
• Los Angeles has the largest MOB inventory in the U.S., currently totaling 37.4 million square feet.

Source: CommercialSearch

In 2023, healthcare spending exceeded $4.5 trillion, accounting for 16.6% of the U.S. GDP. As the largest share of GDP globally, U.S. healthcare spending volume is projected to grow by another 10% by 2027.

MOBs Continue to Show Value

MOBs have proven yet again that they are the bright spot in the office sector and CRE as a whole. Specialized properties like these provide distinct benefits for investors looking for stable and profitable opportunities that capitalize on both the real estate and healthcare sectors. As the demand for healthcare nationwide continues to increase, MOBs will continue to evolve and drive office volume.