The healthcare industry is constantly evolving, but one aspect that remains stable is the buildings used for medical practices. According to Marcus & Millichap’s 2H 2023 Medical Office National Report, vacancy rates have remained steady and investors are drawn to the sector’s stability despite fluctuations in interest rates.
Stability in Property Fundamentals
Analysts at Marcus & Millichap note that medical offices were not as heavily impacted by the pandemic compared to other areas of healthcare. This has resulted in a consistent vacancy rate, with June’s rate only slightly above the long-term average. Additionally, construction of new medical office space has slowed due to rising costs and currently makes up just 10.7% of total office development projects.
Decrease in Transaction Volume
As with other sectors within commercial real estate (CRE), higher interest rates have affected deal flow for MOBs (medical office buildings). In fact, transaction volume decreased by over 30% during the trailing twelve months ending June 2023. The average sales price also dropped by approximately $9 per square foot from its peak in 2022.
Attractive Performance Factors
Investors are attracted to this sector because it offers stable cash flow and favorable lease terms with low turnover rates. Furthermore, analysts at Marcus & Millichap point out that there have been consistent year-over-year rent increases within this market segment. Looking ahead, prospects remain positive for medical offices as demand for healthcare services continues on a macro level despite challenges posed by a tight labor market.
This article was originally published on Connect CRE.
