Strong Market for Medical Office Investment

By Steve Barrett
Monday, January 30, 2017

An evolving healthcare landscape is fueling an expanded patient base and strengthening the outlook for investment in medical office buildings, according to real estate crowdfunding firm CrowdStreet.

Aging baby boomers and the ACA have contributed to larger numbers of patients, who are likely to need more extensive healthcare services. Americans ages 51–69 number approximately 75 million, the Pew Research Center notes, and the U.S. Health and Human Services Department says 20 million people have insurance because of the ACA.

Portland, Oregon-based CrowdStreet points to estimates that U.S. spending on health care could nearly double between 2014 and 2024, from $3 trillion to $5.5 trillion.

“From an investor’s perspective, medical office buildings ... are an attractive niche that is outperforming the broader office market,” the firm says on its website.

During one recent quarter, medical office vacancy rates were 9.5 percent, compared with 12.7 percent for other office space.

Growth in Medical Real Estate Construction

Construction or expansion of medical office buildings and hospitals across the United States grew substantially from 2015 to 2016, according to Revista, an Annapolis, Maryland-based firm that gathers healthcare real estate data.

Medical real estate construction in the pipeline as of late 2016 was valued at slightly greater than $102 billion. That is a 5.1 percent increase from the approximately $97 billion figure from late 2015, Revista notes.

Included in the 2016 figure are medical office building and hospital projects that:

  • Are in late planning stages or already in progress
  • Represent an expansion of a minimum 7,500 square feet
  • Are valued at more than $5 million

Revista reported that hospital construction in the pipeline was valued at $81.8 billion, compared with roughly $20.3 billion in medical office building projects. Median square footage per project for hospitals was 60,000. The figure was 45,000 square feet for medical office buildings.

The Right Medicine for Ailing Malls?

Many cities seek to repurpose space in partially vacant shopping malls. Increasingly, medical offices are filling those gaps.

Denver-based kidney care company DaVita Healthcare Partners is opening as many as 150 locations annually, largely in retail sites or quasi-retail sites in community centers, Garrick Brown, Vice President of Retail Research for the Americas for real estate services firm Cushman & Wakefield, told The Philadelphia Inquirer. While medical offices transitioning into malls is a newer phenomenon, he expects it to grow.

“The big question is if we may start to see entire healthcare campuses moving into struggling malls,” he told the newspaper. “This has not happened in large numbers yet, but we do see this as a likely trend ahead.”

Joe Coradino, CEO for Pennsylvania Real Estate Investment Trust (PREIT), echoes that sentiment. PREIT negotiated leases for medical facilities at some Philadelphia-area malls that it owns. That’s a response to consumers’ desire for convenience and ready access, Coradino says.