Demand For Outpatient Services Continues to Drive MOBs

Article originally posted on Globe St. on February 3, 2023

As hospitals continue to grapple with treating more serious illnesses that may have gone overlooked during the pandemic, demand for ambulatory and outpatient services is rising — with big implications for commercial real estate.

Outpatient volumes are predicted to grow by 16% per the next decade, according to Avison Young, and that upswing will require the healthcare real estate sector to continue to adapt. In particular, the medical office building sector, which has added more than 60 million square feet of space over the last four years across the top 50 US metros, will continue to thrive.

“Demand for healthcare real estate is expected to remain strong, with the growing MOB market attracting significant interest from private investors as well as the country’s specialist healthcare REITs,” the firm notes.

According to Colliers, total investment in MOBs rose from $11.9 billion in 2020 to $17.4 billion in 2021, a sector record. Average pricing rose to $375 per square foot, while average cap rates fell by 20 basis points to 6.1%. As of Q3 2022, investor demand hit its highest trailing four-quarter average on record.

“Historically a lot people view medical office buildings as a recession proof or recession resistant asset class, and that’s largely because the secular drivers are generally things people retain even when the overall economy is under stress,” says Jacob Albers, a research manager in Cushman & Wakefield’s Global Think Tank group. “Healthcare spending is one of the categories consumers tend to cut the least—and we’ve also seen that despite the pressures of COVID, healthcare spending has reached new record highs.”

And while some investors may have stepped to the sidelines as of late due to rising capital costs, medical office buildings remain strong investor favorites.

“The past several years have been banner years for investors with historically low cap rates and many more buyers in the market than sellers,” says Julie A. Johnson, Executive Vice President, Arizona at Colliers. But “medical office buildings will continue to be strong with not only the increase of the senior population but also the population increase in many markets, specifically the Sun Belt cities.”