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There is a growing interest in investing in medical office buildings (MOB) — and for good reason.
While the overall office real estate asset class has suffered significantly over the last several years due to a move to work from home, medical office real estate has been overlooked and appears undervalued. MOBs are now attracting more attention from experienced real estate asset managers. Medical office real estate has strong underlying fundamentals, an exceptional growth trend, high occupancy, long-term tenant leases, and resilience in all economic environments.
Given the current economy and real estate market conditions, investing in medical office buildings is highly attractive, as it is a stable investment with solid upside potential and offers an opportunity to diversify an investment portfolio.
Here are five attractive attributes of investing in medical office buildings.
1. Economic Resilience
The healthcare industry as a whole has shown remarkable resilience through economic cycles, including the recent pandemic. The need for health care and treatment of patients is not subject to downturns due to economic and market conditions.
In fact, just the opposite.
The healthcare industry is a growing sector. There has been a steady rise in the desire to receive health care in convenient outpatient settings to avoid the cost associated with traditional hospital care. 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 combination of convenient locations and significantly lower costs than a hospital has resulted in the increasing desire for medical office space.
2. High Occupancy Rate
Over the last decade, the trend in the management of health care has been to treat patients through medical offices rather than through traditional hospitals. This expansion has led to medical office buildings providing a range of specialized services such as imaging, labs, surgery facilities, and urgent care facilities.
Being part of a medical office building eco-system has become highly desirable to treat patients due to its single-building setting outside the local hospital. Given the range of complimentary services and convenience, healthcare provider tenants rarely relocate leading to high occupancy rates.
In addition to high occupancy, medical office building tenants agree to long-term leases, typically with a duration of five to 10 years. These medical tenants also tend to have strong financial credit. These long-term leases along with financially sound tenants provide MOB investors with a predictable rental income stream with payments that are timely and rarely fall into default.
3. High Retention Rates — Predictable Revenue Streams
Given that MOB tenants usually remain in the same location for extended periods of time, they accept lease terms with steady rent increases. Physicians typically choose long lease terms so that they can remain in one location in close proximity to their patients and hospital services. In addition, medical offices usually have unique buildouts resulting in a high cost of relocating and high retention rates.
Another benefit of the MOB to a health care provider is that there are related medical services offered in the building such as surgery rooms, imaging, and labs. The combination of benefits from the medical office building results in the medical service tenants acquiescing to steady rent increases. For investors, these long leases and high retention rates are indicative of the sector’s stable and increasingly valuable predictable revenue stream.
4. Diverse Tenant Base
Another benefit of medical office building investments is the diverse tenant base. Medical office buildings can have a range of tenants that may include primary doctors, plastic surgeons, women’s health, dermatologists, oncologists, kidney dialysis centers, labs, and imaging services. These tenants have a steady income from co-pays and out-of-pocket payments, as well as insurance and governmental reimbursements.
5. Growth in Demand
Medical office buildings are experiencing the same sort of valuation drivers as multifamily real estate — steadily increasing values due to strong demand, rising rents, and high occupancy. And the fundamental reason for the strong valuations is similar: population trends.
In multifamily, there is enormous real estate demand resulting from family formation by 77 million Millennials. Similarly, the gray tsunami from 73 million Baby Boomers is upon us. Nearly four million more Americans are turning 65 years old this year. By 2030, all Baby Boomers will have turned 65 years old, with many over 80 years old.
Baby Boomers will require an exponentially increasing amount of medical care year after year for the next 25 years. To meet the demand, healthcare service providers require medical office buildings to provide the services. The top three healthcare REITS have grown significantly to a combined market cap over $70 billion.
An increased demand for medical care and medical office buildings will continue as people seek more efficient, convenient, and accessible medical care. For real estate investors seeking a recession-resistant investment, growing demand, and increasing rents and values, medical office buildings are a sound investment.
About Alan Donenfeld:
Alan Donenfeld runs CityVest, an online investment platform that provides individual investors with unique access to institutional real estate private equity funds. They target institutional funds with billions of dollars of real estate deal experience and must rank as a top real estate private equity fund. By pooling capital, CityVest is able to provide unique access as well as enhanced investment terms. To learn more, view CityVest's website.
The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.