U.S. Medical Office Fundamentals Remain Sound

by | 16 February 2021

The U.S. Medical Office (MOB) sector posted a solid performance in 2020. Average pricing and rents increased, and cap rates tightened. MOB vacancy levels are significantly below those for the overall office sector. Net absorption outpaced new supply across the 50 leading MOB markets as a whole. Sales volumes held up relatively well when compared to the broader decline in CRE investment activity.

Key performance metrics for the MOB sector in 2020 are summarized below.

Rents & Vacancy

  • The U.S. MOB vacancy rate stands at 8.6% as of Q4 2020, up from 7.8% at year-end 2019. This compares favorably to the overall office sector vacancy rate of 13.2%.
  • Average MOB NNN asking rents are $20.95 per square foot, up from $20.22 per square foot at year-end 2019.
  • Average year-over-year MOB rent growth across the top 50 U.S. metro markets in 2020 was 1.8%, the same rate as in 2019.
  • Los Angeles has the highest NNN asking rates among the top 10 MOB metro markets at $34.41 per square foot. Boston ranks second at $27.66 per square foot. Chicago has the lowest asking rates among the top 10 at $19.76 per square foot.
  • Rent growth among the top 10 markets in 2020 was led by Miami at 2.5%, followed by Atlanta at 2.3%.

Supply & Demand

  • MOB deliveries in 2020 totaled 20.2 million square feet, down from 22.5 million square feet in 2019.
  • Construction activity remains focused on off-campus projects, with 13.2 million square feet completed in 2020. Deliveries of on-campus projects in 2020 totaled 7 million square feet.
  • Total MOB floorspace under construction stands at 44.3 million square feet, down from 46.2 million square feet at year-end 2019.
  • Demand outpaced supply across the top 50 metro markets in 2020, with 15.3 million square feet of net absorption and 13.7 million square feet of space delivered.
  • Atlanta and Chicago are tied for the greatest amount of MOB space under construction among the top 10 metros, with both at 1.7 million square feet. New York follows next at 1.6 million square feet.
  • MOB space under construction as a share of inventory is highest in Atlanta at 6.1%, followed by Miami at 5.9% and Washington, D.C. at 5.2%.

Capital Markets

  • MOB sales volumes held up relatively well in 2020, totaling $11.1 billion, representing a 12.2% year-over-year fall in activity. This compares favorably to the 32% decline in sales volume for CRE overall.
  • Investment activity rebounded in Q4 2020 with MOB sales volume of $3.6 billion, up from $2.1 billion in Q3 2020.
  • Los Angeles was the most active MOB sales market in 2020, with $767.9 million of assets trading at an average price of $464 per square foot.
  • Average pricing for MOB assets increased to $301 per square foot in 2020, up from $283 per square foot at year-end 2019.
  • Regional pricing for MOB assets is highest in the West at $374 per square foot, followed by the Midwest and Northeast at $331 per square foot and $326 per square foot, respectively.
  • Average MOB cap rates contracted by 20 basis points in 2020 to 6.5%, down from 6.7% at year-end 2019.

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