In the ever-evolving landscape of real estate investment, certain sectors continually prove their resilience and growth potential.

Among these, the realm of medical outpatient buildings (MOB) stands out as a beacon of stability and promise. The soaring demand for specialty care, primary care, and behavioral health, largely fueled by an aging population, has transformed these buildings into prime investment opportunities. But what sets them apart, and why are they deemed healthy investments in today’s economic climate?

Meeting Demand in a Growing Sector

The aging demographic has triggered an exponential surge in the need for diverse healthcare services. As a result, medical outpatient buildings have become pivotal in meeting this escalating demand. Specialty care, primary care, and various rehabilitative services are now more accessible in outpatient settings.

This shift not only addresses the changing needs and preferences of the population but also presents a lucrative investment opportunity.

Resilience in Performance

Amid economic fluctuations, the performance of healthcare-related real estate has stood firm. The sector showcased its resilience during the Global Financial Crisis (GFC), navigated through the challenges of the pandemic, and continues to thrive in the current capital environment. Comparing loan defaults across different asset types highlights the stability of medical offices, a reassuring sign for investors seeking security in their portfolios.

In 2023, rent growth in four of the top 10 leading U.S. MOB markets was above the national average of 2.25%. Miami led the pack with the highest growth, at 2.9%, closely followed by Atlanta, 2.8%, and both Dallas and New York, 2.6%, per Colliers’ latest Healthcare Marketplace report. 

Trends Shaping the Market

Fundamentals in the medical outpatient building sector remain robust. Occupancy rates are on an upward trajectory across most metropolitan areas, outpacing the supply as construction levels decrease quarter over quarter. The high construction costs further amplify the value of existing medical spaces, exerting upward pressure on rents for second-generation spaces.

Since 2010, the medical office vacancy rate has fluctuated between 7.4% and 8.8%. In the third quarter of 2023, the occupancy rate reached 91.2%. On a same-store basis, the median occupancy rate change increased by 3 basis points year over year. Year-over-year same-store revenue growth in Q3 2023 was 3.7%, up from 2.9% one year ago. Year-over-year same-store net operating income (NOI) growth was 2.9% as of September 30, 2023, according to the Revista MOB Sector Fundamentals Report for Q3 2023.

Additionally, the landscape is witnessing strategic maneuvers by Real Estate Investment Trusts (REITs) and other entities. Disposition strategies are being employed to streamline portfolios, while mergers like that between Healthpeak Properties and Physicians Realty Trust merger are set to reshape the market.

Attractive Investment Despite Volatility in the Debt Markets

Interest rates play a crucial role in investment decisions, and the recent decline in rates has sparked interest in healthcare real estate. However, the question lingers: How long will this trend hold? The sensitivity of the 10-year Treasury bond continues to fluctuate, posing a dynamic element to investment considerations.

The start of this new year brings new allocations for lenders and the anticipated influx of deals into the market. Investors who previously delayed bringing their assets to market are now revisiting this decision, adding more opportunities for prospective buyers.

Per PwC’s 2024 Real Estate Outlook report, recent trends show strength in the medical office sector: “Inside the top 100 metro areas, the MOB occupancy rate was 92.8% in the second quarter of 2023. The occupancy rate has been climbing in recent years as absorption (the change in occupied space) has been outpacing square feet completed within the sector.”

Looking Ahead

The appeal of medical outpatient buildings as sound investments persists. Their ability to cater to the rising healthcare demands of an aging population, coupled with their consistent performance amidst economic upheavals, makes them an attractive option for investors seeking stability and growth.

As we step into the new year, the trajectory of interest rates, market dynamics, and strategic shifts by major players will continue to influence investment strategies. However, the enduring fundamentals of this sector remain a testament to its resilience and potential, offering a healthy dose of confidence to investors eyeing the healthcare real estate segment.