Rx for Wealth: Decoding the Allure of Medical Office Building Investments

In light of recent global events and the lingering impact of the COVID-19 pandemic over the last couple of years, there has been a notable surge in interest in medical office buildings (MOBs). This trend is not surprising, considering the compression of multi-family yields in recent years and the significant disruptions in the retail and broader office investment landscapes during the coronavirus issue. MOBs, once considered a niche product, have now taken center stage.

Despite a lower transaction volume compared to previous years, the national average price per square foot stood at $296 in the first half of 2023, according to a?CommercialEdge report. From 2017 to 2022, prices consistently hovered between $260 and $290.

This surge in interest is exemplified by Anchor Health Properties'?recent acquisition?of a 3-property medical office portfolio in Charlotte, NC, and Seattle, WA for roughly $62 Million. Similarly, Intuitive Surgical, a medical device behemoth, has recently?bought several properties in Santa Clara, CA,?paying a combined total of $157 million for the parcels, as shown by documents from Dec. 22, 2023.

Medical office space encompasses a wide range, from a 1,200-square-foot dentist's office in an older converted home to a modern hospital complex measuring millions of square feet. The choice of focus within this sector depends on the specific market, preferred tenant type, and financial capacity. One compelling aspect of investing in medical office buildings is the stability of tenants. Doctors and dentists, often higher-income professionals, provide relative stability that contrasts with average office tenants, particularly in smaller markets or facilities.

For Kevin Smigiel, vice president of Healthcare Advisory Services, with the Phoenix office of Transwestern, one of the biggest advantages that an increasing number of investors are now seeing in the healthcare real estate sector is tenants’ willingness to sign long-term leases. This has prompted some traditional office owners to turn to this particular type of asset class, despite not pursuing such investments before the pandemic.

Investors find medical office assets attractive due to the financial strength and stability of the location exhibited by medical tenants. This makes them ideal candidates for real estate financing, drawing strong debt investments from CMBS and live companies alike. Additionally, potential tax benefits, such as accelerated depreciation, present a significant advantage for owners of medical office assets. First Citizens Bank recently announced that its?Healthcare Finance?business completed two transactions in Texas and Mississippi totaling $99.3 million with joint ventures managed by Kayne Anderson Real Estate and Remedy Medical Properties.

Additionally, it is crucial to acknowledge the management challenges associated with medical office space. Proper management is critical for success, especially considering the complex bureaucratic systems of larger regional and national medical tenants. Global commercial real estate giant,?JLL, recently announcedthat it will continue to deliver Integrated Facilities Management (IFM), Lease Administration, Property Management (PM), and Energy and Sustainability Services for 35 small-format hospitals and emergency departments, totaling 1 million square feet in Dallas, El Paso and San Antonio, TX, Las Vegas, NV, Oklahoma City, OK, Pittsburgh, PA, and Milwaukee, WI, in addition to starting to provide Project and Development Services (PDS) for select markets.

The portfolio is owned by Emerus, the nation’s first and largest operator of neighborhood hospitals. "The most valued aspect of JLL's solution is the caliber of their on-ground team in the hospitals,” said Vanessa Smith, COO, Emerus. “Their commitment and alignment with Emerus goals are highly appreciated, as they demonstrate a strong sense of ownership and dedication. We feel as if they are a part of our own team."

Despite the challenges, the benefits of relatively stable tenants, attractive financing, and potential tax advantages make medical office buildings a compelling consideration for real estate investors. As this asset class continues to gain prominence, investors should assess its potential role within their portfolios and seek expert advice on taxation and cost segregation.

The evolving landscape of real estate investment, shaped by recent global events and the lingering impact of COVID-19, has propelled medical office buildings into the spotlight. High-interest rates and construction costs, as well as uncertainty stemming from the geopolitical context, will continue to have an impact on the sector. However, the continued surge in interest in this asset class is still evident: driven by the stability of tenants, attractive financing options, and potential tax benefits associated with this asset class.

Success in this sector requires meticulous attention to tenant selection and navigating the complex bureaucratic systems associated with larger medical tenants. As investors consider the potential role of medical office buildings in their portfolios, the key lies in leveraging the stability of essential tenants, exploring financing opportunities, and staying informed on evolving tax regulations. As we continue to navigate challenges still being felt from the pandemic, the strategic considerations outlined here position medical office buildings as a noteworthy and resilient option for savvy real estate investors.