US Medical Office Sector Drawing More Interest From Institutional Investors Admid Fundamental Shifts: CBRE Report

04 Dec 2019

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Transaction Volumes Remain High, Cap Rates Low as Institutional Investors Claim Increasingly Larger Share of Transaction Activity

Strong fundamentals have increasingly made U.S. medical office real estate a favorite of institutional investors, keeping investment volumes at high levels and capitalization rates low this year in relation to conventional offices, according to a new report from CBRE.

CBRE’s report cites several factors behind the continued popularity of medical office, including a steady vacancy rate at 10.3 percent despite a 10-year high in construction completions in the second quarter, a sustained increase in average asking rents since 2013, and strong demand for health-care services due to an aging population and other demographic trends.

As a result, transaction volume for medical office buildings stands 50 percent higher this year than before the recession, though it has receded from its early-2018 peak. Foreign investors, domestic institutions and real estate investment trusts are steadily getting more active the medical office market. Cap rates – a measure of a property’s income as a percentage of its price - for medical offices have pulled even with those of conventional offices after years of registering higher.

“There is a continued rush by capital to this property sector,” said Ian Anderson, CBRE Head of Americas Office Research. “This is a generational, secular trend driving interest in this type of real estate. The median age of the American population is gradually increasing, and health care as an industry is moving more toward treatment at outpatient centers and medical offices than at hospitals.”

CBRE defines medical offices as office buildings in which at least half of leasable space is occupied by medical uses such as dental, surgical or special practitioners and services. Many such facilities include special power requirements, lab space and high parking ratios. This classification excludes medical stores, hospitals and long-term care facilities.

CBRE’s report identifies multiple markets with ideal conditions for additional growth in this sector, noting that West Coast markets tend to have the tightest vacancy, and Midwestern markets showed strong demand in the past year.

U.S. Leaders in Medical Office Demand

Market Positive Net Absorption* Net Absorption as Percentage of Net Rentable Area
Chicago 915,000 sq. ft.
 7.3%
Atlanta 557,000 sq. ft.
 2.3%
New Jersey
482,000 sq. ft.
 2.0%
Nashville
416,000 sq. ft.
 4.5%
Inland Empire
384,000 sq. ft.
 9.5%
Cleveland
364,000 sq. ft.
 4.8%
Columbus
264,000 sq. ft.
 3.5%
San Francisco
248,000 sq. ft.
 2.2%
Portland, OR
160,000 sq. ft.
 2.6%
Cincinnati
109,000 sq. ft.
 1.7%

* Net absorption measures the amount of medical-office space newly occupied in the year ended Q2 2019 less the amount newly vacated.

“Multiple indicators – economic and otherwise – point to continued healthy growth for this sector,” said Christopher Bodnar, CBRE Vice Chairman of Investment Properties, U.S. Healthcare Capital Markets. “Americans’ health-care spending has increased exponentially in the past 20 years to an unsustainable rate. As such, the healthcare industry and consumers continue to move toward outpatient treatment to help drive down costs. These are long-term, fundamental shifts that attract institutional investors to medical office.”

To read the full report, click here.

About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Dallas, is the world’s largest commercial real estate services and investment firm (based on 2021 revenue). The company has more than 105,000 employees (excluding Turner & Townsend employees) serving clients in more than 100 countries. CBRE serves a diverse range of clients with an integrated suite of services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.