Steady Fundamentals, Stability Highlight Medical Office Sector

Though the healthcare landscape continues to shift, the buildings in which medicine is practiced provide “welcome stability,” according to Marcus & Millichap. In its 2H 2023 Medical Office National Report, analysts noted that vacancy remained steady and investors liked the sector’s stability, though the interest-rate environment impacted deal flow.

Stable Property Fundamentals

According to Marcus & Millichap analysts, “medical offices were not as affected by the pandemic as other facets of the health care system.” As a result, vacancy rates have remained steady. The June rate was 50 basis points above the long-term average. Additionally, development slowed due to increasing construction costs. “As of September, medical office space accounted for just 10.7% of the total office pipeline,” the report said.

Transaction Volume Falls

Similar to what’s happening in other CRE sectors, a higher interest rate environment has impacted the MOB deal flow. Transaction volume fell by over 30% during the trailing 12 months ending in June 2023. The average sales price fell, too, dropping by 3% from its high in 2022 to $295 per square foot.

Attractive Performances

Investors like the medical office sector because it provides steady property cash flow and favorable lease terms with limited turnover. The Marcus & Millichap analysts also noted that the sector has provided “consistent year-over-year rent gains.” The future looks bright for medical offices. “Demand for health care services on a macro level is unlikely to decrease in any meaningful way, ensuring a stable tenant base, barring external challenges that arise from the tight health care labor market,” the analysts commented.