Medical Office Building Real Estate in Focus

March 4, 2022
By Hans Matta

Investing in Medical Office Buildings

The Medical Office Building (MOB) asset class has exhibited consistent growth in recent years, buoyed by increased demand for outpatient services and strong historical performance.¹ MOBs are a subset of the greater office asset class and are growing in stature among experienced real estate investors. As the name suggests, MOBs are developed specifically for medical professionals to consult with patients and perform various surgical procedures. In this article, we take a look at the major advantages we have identified in investing in medical office space, and why we think it is a particularly favorable time for the asset class.

Why Investing in Medical Office Buildings Makes Sense

Strong Historical Performance

Compared to other asset classes, and the overarching office class specifically, medical real estate generally exhibits steady long-term occupancy rates. CBRE data suggests that medical office vacancy rates have consistently been lower than the total office sector, with vacancy rates falling from 11.1% in 2010 to 8.4% by mid-year 2018. According to the CBRE 2021 Healthcare Real Estate Investor & Developer Survey Results, 90% of CRE firms stated that between 2020 and 2021 the occupancy of their medical office portfolios either remained stable or increased from the year prior.

The strength of MOB occupancy rates is partly due to the length of leases that medical tenants typically sign. Because the physical features of medical buildings are very specific—operating rooms and waiting rooms—the build-out is often more costly than that of a traditional office tenant, and medical tenants typically sign longer leases for this reason. Tenants also tend to stay put longer given the high switching costs associated with relocating. In addition to stable occupancy rates, MOBs have also exhibited consistent rent growth over the past ten years.¹ According to Colliers, average MOB NNN asking rents are $20.95 per square foot, up from $20.22 per square foot at year-end 2019.

Medical Office (MOB) U.S. Vacancy Rate & Average Net Rents

Not only are occupancy rates stable among MOBs, but rent collections have been strong even amidst the current pandemic. Physicians Realty Trust, a healthcare REIT with a strong focus on MOBs, even reported 99% rent collection in Q2 2021.²

Growing Investor Demand

Due to the strong historical performance that MOBs have demonstrated over the past several years, we believe many investors, institutional or otherwise, have taken notice of the asset class’s potential. MOB sales prices have steadily increased over the last decade. Dollar-value-per-square-foot even increased by 49.8 percent from 2013-2018.³

MOBs even showed a relative resistance to the market downturns during the Great Recession, which we think may be a good indicator of how they will perform given the anticipated recession caused by the current pandemic. We believe much of this performance can be attributed to increasing investor interest in MOBs. Even healthcare REITs are shifting their focus to medical office buildings because of their strong performance potential. The big three companies—Healthpeak Properties, formerly HCP ($14.03B AUM), Welltower ($32.92B AUM), and Ventas ($26.61B AUM)—have all become attuned to the attractiveness of the MOB asset class and emphasize strategies involving medical office buildings.

  • HCP partnered with Morgan Stanley and with HCA to invest in MOBs.⁴
  • Ventas has an exclusive arrangement with PMB Real Estate Services, a medical office developer that Ventas inherited when it merged with Nationwide Health Properties.⁴
  • Welltower closed on a $1.25B MOB transaction to acquire 55 MOBs in 16 states in December 2018.⁵

Demand for Outpatient Healthcare

Advancements in technology and clinical innovation, along with a change in patient preferences, have led to a growth in demand for outpatient healthcare services. The number of outpatient centers across the U.S. increased 51% from 2005 to 2016,  and the trend does not show any signs of slowing.⁶

This can be attributed to patients’ desire for more convenient and more affordable access to healthcare, as there is a surge in employer-sponsored, high-deductible health plans requiring patients to pay larger out-of-pocket amounts, and also to healthcare provider’s abilities to perform procedures outside of the traditional hospital setting. To keep up with patient and provider demand, MOBs are being developed at a fast pace across the country; more medical office transactions are being made in cities with high population growth, according to CBRE. In 2019, Chicago, Cleveland, the Inland Empire region, and Atlanta led demand for MOBs in their respective regions.

Recession-Resistant Asset Class

People are always going to need access to healthcare, and while telehealth has emerged as an alternative to traditional medical services during the COVID-19 pandemic, virtual medicine is not a sustainable practice for all healthcare specialties. Trevor Royce, Assistant Professor of Oncology at UNC-Chapel Hill, explains that while telehealth is a great solution for now, there are some questions about its efficacy long-term; “how will the safety and quality of care be impacted? How will we integrate components of the traditional doctor visit, including physical exam, lab work, scans and imaging?…These are all potential downsides if we are not thoughtful with our adaptation.” COVID-related closures have affected the healthcare industry; many MOBs, especially those that offer elective procedures, have been forced to shut their doors. However, despite the current environment, many healthcare tenants are recognizing that “they will need their space for the short and long term,” says Chris Isola, EVP at JLL, who has closed on six long-term leases for healthcare clients during the pandemic. According to Green Street Advisors LLC, MOBs should provide the lowest risk if a recession hits due to COVID-19. There is pent-up demand for regular doctor’s visits and elective procedures, and once the pandemic ends MOBs will be faced with a large influx of patients who could not receive medical services during the time of closure.

A Case Study on Healthcare Real Estate

EquityMultiple recently offered investors the opportunity to participate in a preferred equity investment in the acquisition of two medical properties in the suburbs of Atlanta, Georgia. The Sponsor was a seasoned investment firm with a 10-year track record of investing in commercial real estate in Atlanta. The offering ultimately exited at a net 10.8% IRR%/ gross 12.9% IRR and a 1.1x multiple¹.

For context, we have offered a total of four medical office investments since inception. As of February 2022, EquityMultiple’s medical office investments that are currently cash-flowing have generated weighted average cash-on-cash returns of 8.31%*. More information on all of EquityMultiple’s medical office investments is available upon request.

If you are interested in learning about investment opportunities on our platform or would like to find out more information on medical office properties (or other unique commercial real estate investment opportunities on the EquityMultiple platform) please don’t hesitate to contact us via or schedule a time to speak with our team by clicking here.

¹Source: Benzinga, Supruva Healthcare Group (as of May 4, 2021). Past performance is not indicative of future results.

²Source: Motley Fool, Physicians Realty Trust (as of August 4, 2021).

³Source: JLL (as of July 11, 2018).

⁴Source: GlobeSt (as of November 2, 2018).

Source: Welltower (as of February 2019).

Source: Modern Healthcare (as of December 20, 2018).

*Cash-on-cash return is the ratio of annual before-tax cash flow to the total amount of cash invested, expressed as a percentage.

**About the methodology: We reviewed the annualized weighted average cash-on-cash returns as of December 31, 2021 (effective date) for EquityMultiple medical office investments located in Atlanta, Georgia, Phoenix, Arizona, and Jacksonville, Florida. Data is accurate as of February 22, 2022.

This document is for informational purposes only and is not an offer or solicitation to purchase or sell securities. Investing involves risks, including the potential for principal loss. There is no guarantee that the strategies and services will be successful or outperform other strategies and services. Certain assumptions may have been made in connection with the analysis presented herein, and changes to the assumptions may have a material impact on the analysis or results.

¹Past performance is no guarantee of future results. The investments discussed herein may be unsuitable for investors depending on their specific investment objectives and financial position. Investors should independently evaluate each investment discussed in the context of their own objectives, risk profile and circumstances.

All opinions expressed herein constitute the author’s judgement as of the date of this article and are subject to change without notice. Statements made are not facts, including statements regarding trends, market conditions and the experience or expertise of author are based on current expectations, estimates, opinions and/or beliefs. Such statements are not facts and involve known and unknown risks, uncertainties and other factors. Past events and trends do not predict or guarantee or indicate future events or results.

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