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Medical Office Property Sales Stay Healthy as Investment Demand Outpaces New Supply

REITs, Investment Funds and Others Compete to Buy Limited Supply of Modern MOB Assets
October 12, 2016
Healthcare Realty Trust this acquired Inova Loudoun II, a 103,500-square-foot Class A medical office building on the campus of Inova Loudoun Hospital in Leesburg, VA.
Healthcare Realty Trust this acquired Inova Loudoun II, a 103,500-square-foot Class A medical office building on the campus of Inova Loudoun Hospital in Leesburg, VA.
This week's off-market purchase by Healthcare Realty Trust of a 103,500-square-foot medical office building on the campus of Inova Loudoun Hospital in Leesburg, VA, is the latest example of the fever-pitch competition among buyers for a limited supply of institutional-grade MOB properties available for sale.

"This is as core as core gets, and this kind of high-quality medical office asset seldom trade in the Washington, D.C. market because most of the dominant health systems in the region such Johns Hopkins own all the assets that they occupy," noted Avison Young principal Jim Kornick, who led the team representing a joint-venture between developer Foulger-Pratt and a global real estate investment management firm, which sold the asset for an undisclosed price. "There are just not a lot of trades."

While overall medical office building prices peaked a year ago, pricing has only become more competitive for core MOB assets as investors of every type have retreated from secondary and tertiary markets back to reliable core assets in primary markets, Kornick said.

With strong demand and positive sentiment attracting new types of investors and adding to the competition among buyers, MOB deal velocity accelerated 17% in the trailing 12-month period ending June 30, according to Marcus & Millichap. Average pricing per square foot of medical office space has also advanced 17% to $230 PSF sinc the end of 2014, according to Marcus & Millichap's analysis using CoStar data.

"We had tremendous 20% growth from 2014 to 2015, and clearly, it's continuing on into 2016, albeit maybe not at the same high levels," said Marcus & Millichap's John Smelter, a veteran of three decades in the health care real estate. "The demand is absolutely there."

Smelter noted that the MOB vacancy rate dropped 80 basis points to 8.6% in the second quarter from a year ago, the lowest level in eight years.

Despite recent news and accompanying noise on the presidential campaign trail about potential premium increases next year for Affordable Care Act plans, analysts cite rising patient counts from expanded health coverage under Obamacare, combined with the demographically aging U.S. population, as major demand drivers for the medical office building sector.

Also, as hospitals and health-care systems continue to buy-out private practices and move outpatient services off of main hospital campuses, major health-care providers now control a large share of MOB leasing activity, resulting in heightened demand for newer modern buildings with flexible floor plans. This has resulted in a rise in both new projects and deliveries of new space in 2016, M&M said.

In particular, institutional-grade property deals have seen a substantial uptick in transaction velocity in recent quarters. Sales of such properties have only been limited by a lack of available properties on the market, M&M added.

Off-campus properties with strong tenants with long-term leases are selling for a premium. Other types of off-campus MOBs, including those located in secondary or tertiary markets or properties in need of repositioning, can trade with first-year yields up to 200 basis points higher.

The firm said it is also seeing an increase in so-called crossover capital, in which a number of single-tenant retail investors have acquired single-tenant MOB properties.

But the single biggest factor behind the booming MOB investment market Marcus & Millichap reports is that several REITs and major investment funds that typically focus on senior housing are currently diversifying their portfolios and reallocating large sums for acquiring medical office buildings and even hospital properties.

REITs have announced at least six deals to buy more than two dozen hospitals in the first three quarters of 2016. In the largest such deal, Medical Properties Trust, Inc. (NYSE: MPW) last month agreed to acquire the real estate interests of nine acute-care hospitals across Massachusetts operated by Steward Health Care System LLC for $1.25 billion.

Other MOB investors who previously targeted stabilized assets in core markets are eschewing the lower-risk but higher priced options and scooping up value-add properties or even participating in development and equity placement, Marcus & Millichap said.

One of the newer investors in MOBs is Bethesda, MD-based Global Medical REIT Inc. (NYSE: GMRE), which this week closed on the purchase of nine medical office buildings in three separate portfolio transactions in South Dakota, northern Ohio and East Orange, NJ, with three more buildings scheduled to close in December, for an aggregate $30.9 million.


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