'Volatility Creates Opportunity' For Investment In Medical Office Sector

Medical offices have emerged as a highly sought-after investment target, as the sector appears to be immune to macroeconomic disruptions impacting other commercial property types. 

Medical office building investment rebounded last year with $14.4B in nationwide deal volume, a 67.3% increase from 2023 but still below the $20.5B invested in 2022, according to Colliers.

Average pricing for medical office sales nationwide rose from $302 per SF in 2023 to $339 per SF last year, according to Colliers. The sector's vacancy rate has declined each of the last 15 quarters to 7% at the end of last year.

For Boston-area investors, the market appears strong while other asset classes like office and industrial face murkiness due to the persistence of remote work and the impact of President Donald Trump's sweeping tariff policies.

Industry executives speaking Wednesday at Bisnow's Boston Healthcare and Campus Development event said medical office continues to be a safe investment during tough times.

"There's no shortage of macro, geopolitical and policy-related [news] that's keeping us on our toes every day, but liquidity in the market for medical outpatient buildings is certainly there," Newmark Senior Managing Director Michael Greeley said at the event, held at The Westin Copley Place hotel.

"This is still a safe haven asset class, so in times of tumult in the broader markets, medical outpatient buildings provide a good anchor for institutional portfolios," he added.

Although Boston ranks among the 10 largest markets for medical office space, it delivered the least new MOB space of those 10 markets last year, 91K SF, according to Colliers. Greeley said the slowdown in development has shifted attention to investment.

"We're still in a window of buying opportunity when it's challenging to get anything done," Greeley said.

Jennifer Wong, director of acquisitions at global investment firm AEW Capital Management, said the firm has been focused primarily on single-tenant outpatient buildings near hospital systems. With the recent shifts in interest rates and tariff concerns, Wong said it has actually resulted in more opportunities.

"Volatility creates opportunity for us," Wong said. "Any groups that are on the sidelines waiting to get into space for the first time, they don't have the first-mover advantage that we would."

Wong said working with healthcare sector partners has been advantageous because they have on- and off-market opportunities lined up and can see through the short-term volatility that could impact the space.

"I think you'll get rewarded as an investor, but it's certainly tough to close deals in the short term, but that also creates opportunity, as it precludes certain new entrants from doing deals," she said.

AEW partnered with Flagship Healthcare to acquire an eight-building portfolio of ambulatory surgery centers and medical offices in Texas, Arizona, Michigan, Illinois, Missouri, Tennessee and Florida in 2022.

The firm hasn't done any development deals lately because of the high costs of construction, but Wong said the asset class remains resilient as other assets like industrial, which is impacted by tariffs, face pressures.

"We haven't done any development in this cycle," Wong said. "Mostly because of costs, quite frankly. We find that there's more opportunity to buy existing buildings."

Investors have been active in the medical office sector across the country this year. In February, National Healthcare Properties sold a 10-building, 300K SF medical office portfolio to a joint venture between Altera Fund Advisors and TPG Angelo Gordon for $108M. In January, Bain Capital and Atlanta-based Evergreen Medical Properties acquired a medical office building in D.C.'s West End neighborhood for $45.5M.

Rather than build ground-up projects, some healthcare real estate companies have pursued conversions of underutilized buildings into medical uses.

US HealthVest Chief Development Officer Martina Sze said her company has been successful in converting old office space into new behavioral health centers across the country.

Behavioral health clinic demand has continued to skyrocket since the beginning of the pandemic, with investment growing to $3B in the last 10 years.

"2024, for us, for our business, was actually a strong year," Sze said. "Mental health demand has just continued to increase over time. I've been with the organization for 15 years, and every year there's more, and last year we took the opportunity to expand internally."

The healthcare developer also partnered with UMass Memorial Health to build a 120-bed psychiatric hospital in Worcester in 2017 as part of a conversion of an old office building at 100 Century Drive. The hospital has since sold for $27M.

"That's cheaper and it's faster," Sze said. "You don't have to go through zoning. We actually prefer to renovate than build new."