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Sales of Medical Office Properties, Though Healthy, Trail Behind Last Year’s Levels

Sales of Medical Office Properties, Though Healthy, Trail Behind Last Year’s Levels

After a stellar 2015, investment sales volumes and construction activity in the medical office sector are showing a healthy pace. But whether 2016 will top last year’s activity levels may just be a matter of politics.

In the 12 months spanning from July 2015 to June 2016, 665 healthcare properties representing more than 40.4 million sq. ft. of space were sold nationally, according to medical real estate information company Revista Med. The total dollar volume came to $12.24 billion. At this point last year, that figure stood at $13.7 billion.

"Investing activity appears to be leveling out right now, after highs in 2014 and 2015,” says Hilda Martin, principal with the company. “Cap rates are steady the last few quarters.”

In the first half of 2016, investment in medical office buildings (MOBs) totaled $3.5 billion, Revista Med reports. That’s down from $5.1 billion in the first of half 2015.

Average price per sq. ft. for MOBs has trended downward since its second quarter 2015 peak of $316, according to Revista. The average price per sq. ft. in the second quarter of this year was $294.

Industry sources are mixed on whether the medical office sector will surpass 2015’s investment sales volume as investors are waiting to see what the November presidential election brings. The properties most in demand right now are those with leases of up to 15 years, adjacent to or close to a hospital, notes Krone Weidler, director and founder of Integrated Healthcare Investments, an affiliate of brokerage firm Marcus & Millichap.

Overall, cap rates in the sector have remained flat during the past two quarters, at 6.6 percent. However, cap rates for off-campus medical properties, which currently average 6.8 percent, are trending downward. These properties could see further cap rate compression, according to Martin.

“Historically, many REITs have favored MOBs on campus, but now they are considering more opportunities off-campus and out in the community. If these off-campus properties have a solid hospital tenant, investors see them as a good investment," she says.

Building Up

Meanwhile, construction starts are trending up, driven by physician practices consolidating and being bought by hospital systems.

“I continue to be bullish on the investment in medical office buildings. Construction of MOBs continues to be robust.  The current number of MOBs under construction throughout the United States is at 657, with California and the Southeast leading the way,” says Weidler.

“There was no work in this sector for the longest time. Construction sat flat for six years,” says Alex Carrick, chief economist at construction data firm ConstructConnect. “After the Supreme Court ruled Obamacare was constitutional last summer, it seemed to open the floodgates. Construction and employment in this sector have taken off.”

In the first half of 2016, there was $1.5 billion in new medical miscellaneous construction (the category under which medical offices are bundled), representing 4.49 million sq. ft of space, according to ConstructConnect data. Hospital and clinic starts have led the way in medical construction so far, with $9.6 billion comprising 17.7 million sq. ft.

As of June, there were more than $100 billion in projects either in late planning stages or under construction, according to Revista estimates. “This is all hospital and medical office projects,” notes Martin.

“People are committed to healthcare. When you need it, you need it,” Carrick adds.

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