INDIANAPOLIS-Soon after the recession began taking its toll on the office market in the form of diminishing demand, higher vacancies and negative absorption numbers, those who track the medical office marketāand some who previously paid little attention to itābegan remarking on how this one segment of the office market was marching to its own tune.
Medical office marches on, according to some new reports about the healthcare-related segment. The reports foresee stability and growth for the medical office segment despite the dismal forecasts for general office space, although the medical office portion of the market has not been spared entirely.
“There will be a significant increase in both short- and long-term demand for medical offices and outpatient facilities,” declares a new report from BremnerDuke Healthcare Real Estate, the healthcare facilities development arm of publicly held Duke Realty Corp. Deeni Taylor, executive vice president of BremnerDuke, notes that during the past two years, BremnerDuke medical office properties have performed favorably, with occupancy remaining near 90%. Taylor notes that, during the past year, Duke Realty has raised more than $1.5 billion in capital, “which will enable us to efficiently take advantage of these opportunities,” Taylor says.
A report by Marcus & Millichap points out that, even with the turmoil in the economy, only 1% of MOBs are now distressed, equating to just $200 million in troubled loans, compared with almost $20 billion for the 3% of traditional office assets now at risk. Nonetheless, Marcus & Millichap points out, the MOB segment remains under pressure. “Recessionary stresses and rising medical costs have kept a portion of the US population on the sidelines for elective outpatient care, easing demand for physiciansĀ services and, in turn, medical space,” the report states. As a result, deliveries of new medical space have recently outpaced absorption and vacancy has ticked up, forcing operators to lower rents in an effort to keep occupancy levels in check, according to the Marcus & Millichap report.
The national debate about healthcare reform “is especially relevant to the MOB market, as any measures passed by Congress could further bolster the sector,” Marcus & Millichap points out. It cites estimates that if 50% of the 46 million people who are now uninsured gained coverage, the added demand would require nearly 45 million square feet of MOB space beyond what is needed to satisfy normal demand trends. BremnerDuke notes that some projections call for adding as much as to 61.9 million square feet of additional MOB space, based on the current ratio of 1.9 square feet per insured person.
BremnerDuke approach in today’s market is concentrating on “cultivating relationships in markets where demographics point to strong projected growth,” the company says. In the 20 markets where Duke Realty has a strong presence, the firm is leveraging its healthcare expertise and experience to develop relationships with local hospitals. BremnerDuke has also focused on developing strong relationships with regional and national healthcare systems across the country.
Another point in the Marcus & Millichap report is that, although lenders are favoring MOB assets, transaction velocity has been stymied by the capital markets crisis and subsequent lack of available credit. “Increased equity requirements have put a damper on purchases,” as the loan-to-value ratios allowed by lenders have dropped from 90%, including mezzanine debt, to 60%. Although deal flow has slowed, MOB sales as a share of total office activity have risen from 14% to 25% over the past seven years, the report shows. “This clearly demonstrates the continued draw of MOB product, which provides higher risk-adjusted returns and more stability than traditional office assets,” it says.
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