With an aging U.S. population and the fate of President Obama’s healthcare reform law settled, the medical-office sector faces a promising future, according to experts on the most recent episode of the “Commercial Real Estate Show” radio program hosted by Michael Bull.
The episode looked at the sector and explored a variety of topics related to medical-office buildings, including vacancy rates, cap rates, property management challenges, overall strengths and possible challenges for the sector.
“To me, it’s a recession-resistant investment,” said Walter Page, director of research for CoStar Group. “It has had good occupancy over long periods of time, and consistent occupancy is the number-one driver of returns. The demand is great in that you have demographics in your favor with the Baby Boomers aging. Also, you now have the expansion of medical services to a broader part of the population.”
The national vacancy rate for medical office buildings is currently 10.9 percent, which is significantly lower than the 12.5 national rate for the office sector as a whole, Page said.
Occupancy should continue to be a positive for the healthcare sector in part “because the job numbers that drive medical office are exceptionally strong,” Page added.
Short-term challenges to the sector’s performance include the so-called “fiscal cliff” and potential cuts in Medicare spending, according to Page. An oversupply of buildings may become an issue in certain markets as well, he added.
The U.S. Supreme Court’s recent decision to uphold the federal Affordable Care Act has strengthened the medical-office sector, said Mark Engstrom, executive vice president of acquisitions for Healthcare Trust of America. “Health-care systems are starting to make decisions, to take on additional space for their growth,” Engstrom said. “We see the same thing with physicians: they’re now more willing to sign longer-term leases because the [law] is here to stay.”
Paul Zeman, a partner with Bull Realty who oversees the firm’s Healthcare Real Estate Services Group, said investment sales of medical office properties are increasing. Approximately $5 billion of healthcare property sales will take place in 2012, and that figure should rise by 10 percent next year.
A surge in sales could take place in the fourth quarter of this year, as investors seek to complete transactions before potentially less favorable tax laws are implemented in 2013, Zeman added.
“I still love the sector,” Zeman said. “I’m a firm believer that it’s one of the strongest sectors in commercial real estate.”
The entire episode on the healthcare industry and medical real estate is available for download at www.CREshow.com.