Medical real estate is a growth area for commercial real estate. Medical real estate is different from traditional office or retail real estate. It offers unique advantages that appeal to a distinct group of investors. But who exactly is a buyer of healthcare real estate, and why? Let’s take a closer look at the profiles of these investors. We’ll uncover the driving forces behind their decisions.
Medical Real Estate Investment Demand
Investment demand for all types of medical real estate, including clinical offices and outpatient surgical facilities, remains strong. Medical real estate sales in the United States reached $12 billion in 2023, doubling since 2018.
Healthcare real estate transactions totaled approximately $5.5 billion in the first half of 2024, a 10% increase over the previous year, according to Revista, the nation’s biggest healthcare data and analytics organization.
Over the last many years, Private Equity Groups have been net-buyers (purchasing more than they sell), whereas physician-owners of real estate have been net-sellers. What makes the graph fascinating is the movement in buyer types over the last five years. Physician-owners of ASCs and Surgical Hospitals have been driving a substantial portion of the supply and increase in medical real estate transactions, as these groups handle succession planning and investigate M&A expansion and liquidity possibilities.
Despite volatile capital markets, medical office buildings remain an attractive and stable investment, according to the survey results. Almost 90% of our survey respondents say occupancy rates have increased or remained stable in the last 12 months. 86% of respondents expect their portfolio of MOBs to perform similarly or better in 2024.
84% of respondents expect yearly rent increases of 3% or more for new or renewed MOB leases. 80% of respondents expect a lease renewal rate of 85% or higher. Only 3% of respondents expect a reduced lease renewal probability in their area; 65% believe renewal probabilities will remain unchanged, and 32% expect a higher likelihood of lease renewals.
Nearly half of respondents believe rental rates have increased, while the other half say they have stayed the same. 76% of respondents believe they need to offer tougher tenant improvement packages to get tenants to sign or renew. However, only 16% feel they need to be more aggressive in offering lease incentives such as free rent to sign tenants. This may indicate that inflation is driving the demand for larger tenant improvement packages rather than landlord concessions or broader repair needs.
Questions Regarding the Size of the Building
The size of the building will determine which kind of investors are interested in the property. For example, larger, multi-tenant medical office buildings will typically appeal to major public investors (such as real estate investment trusts) as well as larger private enterprises, such as family offices. In addition, large, multi-tenant buildings often necessitate more intense management, which prospective investors should consider.
Alternatively, an investor may lease a huge property to a single tenant. Of course, this has both advantages and disadvantages. Assume the tenant has a high credit score, a good reputation, and a long history in the community. In that circumstances, the tenant’s long-term viability in that building is unlikely to be a major worry. However, whenever a large property is leased to a single tenant, there is always the chance that the tenant will quit, face financial difficulties, or, in the worst-case scenario, go bankrupt. Investors considering purchasing big, single-tenant MOB properties should consider how a worst-case vacancy scenario will affect their overall investment portfolio.
The size of medical office buildings can vary greatly. There are also much smaller, single- and multi-tenant properties measuring 5,000 square feet or less. MOB facilities like these are typically acquired and sold by local investors, such as individuals and small investment groups.
Specialized Investment Firms
Companies like MX Properties Inc. have carved out a niche in the medical real estate market. MX Properties Inc. focuses on acquiring and managing high-quality medical office buildings and outpatient facilities. Their expertise in the healthcare sector allows them to identify properties with strong growth potential and secure leases with reputable healthcare providers. This specialized knowledge gives them an edge in a competitive market.
Conclusion
In short, the survey results show a market with strong fundamentals notwithstanding capital market problems. Cap rates are rising, which means valuations are falling and transaction volumes are also declining. Previous experience implies that this dynamic may present a major chance to acquire high-performing assets at good historical relative prices.
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