Medical office properties are rapidly becoming some of the most prized assets in real estate. They have survived the global crisis caused by the spread of the coronavirus with strong rents, on average, and very little vacant space.
“A well-functioning medical office is going to trade as aggressively as the best downtown office building,” says Chris Bodnar vice chairman and co-Head of healthcare and life sciences capital markets for CBRE, working in the firm’s Denver offices.
Eager buyers spent $3.8 billion on medical office buildings in the fourth quarter of 2020. That helped make up for deals that did not close in the spring and summer because of the pandemic. It brought the amount that investors spent in 2020 to a total of $10.6 billion, according to Real Capital Analytics.
That’s just 3 percent less than investors spend in 2019—despite that chaos caused by the coronavirus. Just to compare, investors spent 41.8 percent less in 2021 to buy conventional office properties compared to 2020.
At the same time, price rose compared to the income produced by medical offices. Average cap rates for medical office have compressed about 20 basis points year-over-year and the average price per square foot increased by 5.5 percent over the same period, according to Real Capital Analytics.
“The amount of capital available for real estate—and medical office properties in particular—has just swelled,” says Mindy Berman, senior managing director and healthcare group leader for JLL, working in the firm's Boston offices. “The pandemic has proved the investment case again for medical office properties.”
The amount of space at medical office properties that is occupied by tenants has stayed between 91.5 percent and 92.5 percent on average for more than a decade, according to JLL’s Berman. “The occupancy rate has barely moved through the Global Financial Crisis and the pandemic,” she says. “And medical office rents are predictable. They barely budge, compared to conventional office rents in Manhattan that seesaw.”
It turns out that medical offices need space to see patients—even in a pandemic in which people with existing health needs were especially vulnerable to the disease. Many doctor’s offices shut their doors early in the pandemic—only to reopen for business later in 2020.
“It’s about the continued need for physical space and the need for patients to continue to be seen,” says CBRE’s Bodnar. “It’s not like retail space. You can decide to stay home from a movie or going out to dinner, but it is very difficult to defer spine surgery or cardiac surgery.”
The tenants at medical offices properties have also become even more dependable as health provided have merged and acquired each other. “There are fewer health systems and bigger health systems—which is credit positive,” says Berman.
The buyers interested in medical office buildings include a growing number of private investment funds, investment advisors and pension funds. They join the specialized healthcare REITs that have historically been the biggest aggregators of medical office properties.
Most recently, healthcare REITs have announced institutional joint ventures—several have recapitalized their holdings with pension funds, sovereign wealth funds and foreign capital. “There is an inordinate amount of capital chasing medical office buildings,” says Berman. “We could have $20 billion in transactions in a year if we had the supply of product available for sale.”