Demand for Medical Office Buildings Extends Far from Hospitals

By Clint Hinds, Bentall Kennedy

A major shift in the healthcare delivery model is opening up a more geographically diverse market for medical office building (MOB) space.  Demand is moving beyond hospital campuses to become more deeply embedded in the communities they serve.  And this trend represents new opportunities for investors and developers.

The MOB market is thriving, with good prospects for years to come.   Despite new development averaging 11.6 million square feet annually over the past seven years, the national vacancy rate is about 9.5 percent and has been trending downward for several years. Rent growth is more stable than other office sectors, and we expect rents to increase at a steady pace given current vacancy levels and the outlook for demand and supply.

Due to heavy investor interest in the sector, outsized investment returns may be difficult to achieve. That said, MOB investment offers attractive opportunities for solid income, stability and appreciation, based in part on increasing demand for healthcare services. U.S. outpatient visits increased 58 percent between 2002 and 2012, as inpatient visits fell by 32 percent.  The trend has continued in recent years in part due to the Affordable Care Act (ACA), which has expanded the pool of insured patients by an estimated 10 million people, resulting in a marginal increase in medical visits. ACA is designed to motivate healthcare providers to reduce costs and to focus on community wellness—two goals that are served by offering medical services in buildings that are convenient for patients.

The increase in demand for MOB space is driven by many trends beyond ACA, such as the aging of the Baby Boom generation, new technologies that enable more medical procedures to be performed in outpatient facilities, and higher levels of chronic diseases.  These factors ensure that the MOB sector will continue to grow, but until recently that growth was confined mainly to the areas around hospitals.

Today’s healthcare delivery model focuses more on patient convenience and is less dependent on its proximity to the hospital.  Chronic patients are more likely to follow a treatment regimen if they can get to facilities quickly and get in and out easily.  As providers start thinking of patients as consumers with choices, MOB location strategies are becoming more like those for retail properties—high-visibility sites with good ingress and egress and convenient parking.

Despite the expansion of MOB product farther from hospitals, new developments are most likely to be successful when they are affiliated with dominant hospital systems. There is still a continuing need for MOBs to attract doctors who value proximity to hospital campuses, but many physicians are gaining more flexibility in choosing locations as more procedures are performed in outpatient settings.

Moreover, speculative MOB projects are rare, as development partnerships expect to significant preleasing before breaking ground.  However, there are many opportunities to convert properties from other uses into MOBs, and to rehab existing MOBs in order to make them more efficient.  Healthcare requirements are increasing rapidly enough to fulfill both needs: MOBs near patients, and those near hospitals, more convenient for doctors. Investment and development partners can help providers use space more efficiently, rein in costs and encourage more frequent patient visits.

      —  Clint Hinds, Senior Vice President in Bentall Kennedy’s Washington, D.C. area office, serves as a Portfolio Manager overseeing multiple separate account relationships and client investments, including medical office buildings.