Investors Pour Billions Into Medical Office Sector In Search Of Stability
Investors nationwide are starting to look for more durable asset classes as concerns of a recession become a greater factor, and many are turning their sights toward medical office buildings.
Last year, the medical office sector saw a record $15.4B in transactions, according to Newmark. Industry experts say investment has risen because the sector benefits from stickier tenancy, the aging demographic and the portfolio diversification it brings. The record amount of capital raised to deploy into alternative commercial real estate sectors has also led more investors toward MOBs.
“There’s been a steady increase in the amount of institutional capital that has been allocated to medical offices,” said Michael Greeley, senior managing director at Newmark, during Bisnow’s Boston Healthcare Summit on Tuesday.
Greeley, a top medical office investment sales broker in the Boston area, said he saw the level of new interest on display last week when he met with a host of investors at a three-day medical office conference.
“Half of those meetings were new capital trying to get into the space, and they said ‘we want to get in sooner than later, because we think we’re entering a recessionary environment, and that’s why we like medical office,’” Greeley said.
Nationally, medical office space saw overwhelming interest in 2021, according to a Healthcare Capital Markets report from Newmark. Last year’s investment volume of $15.4B beat the prior record of $14.9B in 2017. And it was up from $13.5B in 2020, one of the largest annual rises in investment levels.
The report also highlighted an increased level of capital being raised to invest in commercial real estate. Almost $77B was allocated toward alternative commercial real estate sectors, including MOBs, according to Newmark.
With major shifts in the state of the economy from the pandemic to the rising concerns of a recession, investors and brokers are turning their attention to properties like medical offices that can act as a safety blanket.
“When we look at what sectors are most durable, thematically medical office is top of the list,” said Jennifer Wong, vice president at AEW Capital Management, a global real estate investment manager with $93B in assets under management. “We really increased our allocation into healthcare and especially with the Covid pandemic really making traditional office a less desirable asset class, a lot of that capital is also going to be allocated towards medical office.”
In the greater Boston area, a string of MOB sales has closed in the last year. In December, STARS REI, a Chile-based real estate firm, acquired a four-building medical office and office hybrid campus in Wellesley, a deal Greeley’s team brokered. Cristina Dawson, senior vice president and head of asset management at STARS, said that the deal was unprecedented for the company due to its location.
“We typically are primarily downtown, urban core investors,” Dawson said. “Because this particular deal in Wellesley was so well-located … It gave us a little bit of a hedge, in addition to providing a little bit of diversity in the medical side.”
Also in December, Newmark brokered a sale of almost 60K SF of Class-A medical office space in Natick to Principal Real Estate Investors for $25M. Earlier last year, Newmark arranged another sale of MOB in downtown Boston.
Investors have been drawn to medical office buildings in a variety of locations as demand for the facilities spreads out. Coming out of the pandemic, many tenants have started looking for spaces closer to patients, especially older ones who don't want to drive to hospitals that are farther away.
“If you look at the statistics, patients over the age of 65 spend three times as much per capita on healthcare than the rest of the population,” Bain Capital principal Hon Wing Mak. “As the population gets older, it’s only natural that there is more of a need for healthcare and that’s going to trickle down to the need for medical offices or other healthcare real estate.”
Another reason for the interest in medical office spaces is the longer weighted average lease terms that come with them. Tenants are more likely to sign longer-term leases and renew them to avoid the hassles of moving and disrupting operations.
“When we talk about sticky tenancy, that’s very simple and self-explanatory,” Greeley said. “You very rarely get an email from your physician’s office or cardiologist saying ‘Hey, we’re moving.’ If they’re moving you can almost always guarantee that it is because they needed more space.”
As more investors look to buy medical office buildings, a slowdown in construction during the pandemic has created a scarcity of inventory.
Healthcare facilities typically sign pre-leasing agreements to help start a project, but during the pandemic their focus was turned away from construction. Many construction projects faced rising costs last year across all asset classes, but within the medical office space, construction costs were up 15 percent, the Newmark report found.
This year, construction has seen an uptick, but cost escalation has caused many institutions to rework current projects to stay within budget while also meeting demands.
“Covid paused a lot of construction around here, especially in the healthcare institutions as they needed to react to the pandemic. Now we are seeing a flurry of activity,” Wise Construction Chief Operating Officer Shawn Seaman said.
In 2021, development volume of medical office space declined, with national construction starts down 15.6% and completion of projects down 10.6%, according to Newmark, leaving new medical office space supply short.
“Escalation and supply chain are really changing the reality of project delivery cycles,” said David Flanagan, senior director of capital facilities at Beth Israel Deaconess Medical Center. “Our capital budgets are fixed, and if it’s more difficult for us to treat the volume of patients we need to treat, our capital budgets are impacted by that. Not only are they fixed but they might be getting smaller.”