Our View of the Medical Office Market: Q2 2024

A Note from Chip Conk:

As we approach the mid-point of 2024, our outlook for the medical real estate marketplace—and our strategic approach to it—remains essentially unchanged. Overall, we are cautiously optimistic regarding the near term and bullish about the longer-term prospects for our sector.

When the year began, even as Montecito continued to enjoy ample access to capital, many previously active participants in the MOB market (particularly REITs) stayed on the sidelines. During the first half of 2024, we continued to see a hearty appetite for medical office properties among institutional investors eager to deploy their capital productively. Accordingly, our cautious optimism on the capital side has increased since January.

At the same time, we are less optimistic that we will see the rate-cutting by the Federal Reserve that many had predicted for 2024. Our macroeconomic thesis is unchanged: We are confident that we have reached a peak interest rate environment, the larger economy will continue to display strength, and the odds of a recession will continue to diminish.

What has not diminished is our enthusiasm for medical office real estate as an investment opportunity. The fundamentals undergirding our sector not only remain solid but are steadily becoming even more favorable as the population ages, demand for healthcare services grows, and more delivery of care migrates to outpatient medical office settings. Occupancy rates for MOBs nationwide are at an all-time high, leasing demand for these properties continues to outpace supply, and, as Revista recently reported, annual rent escalators in many cases are surpassing 3%.

“The lack of new [medical office] supply and favorable demographic trends offer an attractive investment environment for healthcare investors.”

Our own recent experience reinforces this view. Over the past six months, we have sold several individual assets from our portfolios. These properties are attractive to buyers through 1031 exchanges even as portfolio sales have decreased. Since we began offering properties for sale, we have seen more favorable cap rates, a healthy indicator for both Montecito and our marketplace. We anticipate that more leveraged buyers will put sidelined capital to work and generate renewed demand for portfolio sales that provide some of the best opportunities for cap rate compression.

Our approach to the market remains patient and disciplined. Because Montecito has remained an active participant in the medical office market while others stepped back—and because we have earned a track record for aligning our interests with medical office owners and building wealth for physicians— we see a large volume of potential acquisition opportunities relative to many other buyers. As a result, we can be highly selective in pursuing assets that meet our criteria and that we believe offer the most potential to generate the returns we seek.

Sincerely,

Chip Conk, CEO Montecito Medical Real Estate

We’ve been busy!

Through the first five months of 2024, Montecito Medical continued our brisk acquisition activity, adding 20 properties to our portfolios. Here’s a sampling:

For more Montecito Medical acquisition news, click here.