Report: Medical Office Sector Thrives Amid Disruption

Colliers, San Francisco, Seattle, Los Angeles
Courtesy of Colliers

By Meghan Hall

Confidence in the medical office sector has never been higher. Once considered a “niche” asset class by those in the commercial real estate industry, the pivotality of medical real estate has been highlighted over the past several years as the result of the pandemic. A recent report released by Colliers indicates that 2021 was a record-breaking year for the asset class, and the medical office’s performance is expected to continue amid heightened demand.

“It was kind of angel investors initially and then it was those looking for core-plus,” said Colliers’ National Director Shawn Janus. “I think a big part of that is we’ve gone through several cycles here…[healthcare real estate] is very recession-resistant. It is not nearly as affected by the downturns. We also don’t have the wild swings on the upside, and I think that’s attracted investors because [it’s] a safe haven…It’s definitely become more of an accepted asset class.”

At the end of 2021, medical office building (MOB) vacancy declined to 8.3 percent, a favorable statistic when compared to that of regular office space, which saw its vacancy rise nationwide to 14.8 percent by end of year. Additionally, demand for MOB continues to rise; Colliers notes in its latest report that demand is more than keeping pace with supply. Across the nation’s top 100 markets, net absorption totaled 19.1 million square feet, up from 17.6 million square feet in 2020. 

“It seems counterintuitive, and what is so unusual in the healthcare space right now is that even though interest rates are going up, cap rates continue to compress,” added Janus. “That risk premium is narrowing but it still is attractive relative to other classes, like multifamily.” 

As fundamentals have strengthened, so has investment interest, with total MOB office investment hitting $17.4 billion. This, according to Colliers, is the highest on record and up significantly from the $11.9 billion worth of deals closed in 2020. MOB also accounted for 60 percent of medical real estate sales volume. Pricing also continued to rise, by the end of the year, MOB pricing was about $375 per square foot, up from $339 per square foot in 2020. Cap rates also continued to decline, lowering to about 6.2 percent by end of year.

“During good times, [healthcare real estate] is not the glitzy one, where private firms can come in and make a killing,” said Janus. “But as part of a portfolio strategy…it does balance out that portfolio. If they are investing in riskier assets, [healthcare real estate] can help them stay the course. Slow and steady wins the race.”

Looking ahead, challenges remain that could impact how the medical office sector evolves. The pandemic is far from over as the BA.2 Omicron variant continues to make its mark. Should COVID-19 become endemic, like the flu, questions will remain around processes for routine screenings, appointments and other preventative services. 

Colliers also notes another major roadblock for the sector: investors may be pursuing new medical office space but providers may not have employees to fill them. The recent pandemic has increased industry burnout, leading to an “unprecedented” dearth of health care professionals. Healthcare employment has fallen by about 450,000 since the onset of the pandemic. The median turnover rate for Advisory Staff in the sector has also risen to 18.8 percent, up from 15.5 percent in 2020. Nurse turnover reached similar levels at the end of 2021, hitting 21 percent.

Lastly, the emergence of telehealth and digital health as viable ways to provide patient care. Colliers notes in its report that digital health is breaking fundraising records, with $30.7 billion in VC raised in 2021. During the fourth quarter alone, $7.6 billion was raised–a 68 percent year-over-year increase. Other digital health sectors also garnered large shares of funding, including data analytics, mobile health apps, wellness and wearable sensors.

“I think the future of the sector in 2022, despite those headwinds, looks bright,” Janus said. “Everyone had a great 2021, the first quarter of 2022 has gotten off to a rousing start. Many believe 2022 will be a very good year.”