Medical Office Research Report
National Report, Second Half 2014
Healthcare Consolidation Bifurcating Medical Office Market
Expanded health insurance coverage and the overall aging of the U.S. population bode well for the medical office sector and continue to attract investors to the marketplace. During the next 10 years, the 65-plus age cohort, who average 2.5 times the number of physician-office visits than the rest of the population, will grow by 17 million individuals. The non-elderly populace will expand at a more measured pace during the same 10-year span; however, greater utilization of insurance exchanges, along with Medicaid expansion, will help provide coverage to an additional 27 million people in this segment. While implementation of the Affordable Care Act (ACA) and favorable demographic trends will undoubtedly boost demand for medical services, quantifying the impact on future medical office space needs has become increasingly difficult. Multiple trends muddy the forecasts, including a growing physician shortage, the proliferation of in-store clinics, telemedicine, evolution of the care delivery model and overall healthcare-industry consolidation. While these variables introduce more unknowns into the long-term outlook for the medical office sector, they have begun to factor into property-level performance and values.
The shift toward a more consumer-centric delivery model, for example, has encouraged hospitals and health systems to bring more care into communities, mostly by way of outpatient facilities and satellite offices. These large providers tend to favor newer medical office properties, which typically offer flexible designs and incorporate features that promote efficiency and maximize space utility. Aesthetics and visibility also carry more weight in major providers’ real estate decisions, as outpatient expansion brings with it tremendous opportunities for marketing and branding. To this end, the lion’s share of new space demand is now being funneled into modern buildings, driving down vacancy rates and supporting above-average rents for later-vintage assets. That said, the growing involvement of hospitals and health systems in lease negotiations likely will inhibit future rent growth, as major providers often have both scale and credit working in their favor. For owners, however, landing a sizable tenant can not only reduce management costs but may also elevate property value. During the past year, medical office buildings with major hospital tenants traded for an average of nearly $270 per square foot, which reflects a roughly 40 percent premium to the overall market.