The COVID situation brought in a tough time for the real estate industry. While the office sector is still far from recovering from COVID-19, the medical office building market is continuing to thrive mainly because of asset specificity.
Generally, this sector has a low vacancy rate wherein some stable tenants occupy the properties for extended periods.
In addition, the aging population and all the upgrades in medical technology are supporting the demand for such spaces. It is thus no wonder that the interest from investors who are picking up MOB assets is on the rise.
Thus, the medical office sector is here to stay and will grow tremendously.
An investment in office real estate will be fruitful for investors. Let’s take time to dive deeper into it. Read ahead to get proper insights.
Understanding the current situation of medical office real estate
Compared to the other sections of the real estate industry, medical office real estate is going strong in the CRE industry and is performing great despite a low transaction volume compared to last year.
It is seen that the national average price per square foot during the first half of 2023 remained at $296. The commercial edge submitted the report.
From 2017 to 2022, the price has significantly hovered between $260 and $290, showcasing the frequent increase in demand and the need for medical office space.
The vice president of Healthcare Advisory Services stated that one of the most significant advantages is an increase in investors now seeing healthcare real estate sector tenants and willingness to sign long-term leases.
This has prompted some traditional office owners to switch to this type of asset class despite not pursuing such investments before the pandemic.
The number of office owners who previously chose to pursue a medical deal in the office buildings had a fear of offending office users, but this is not the same now.
They have now become more willing to chase medical deals to increase the occupancy in their investments. This makes perfect sense as there will be better credit, longer contracts, and stickier tenancy.
Until recently, medical office spaces were seen as a great alternative asset class, but now they are more of a significant or mainstream investment sector.
As per the investors, all the top-notch experts in the medical industry are now agreeing that medical office buildings are recession-proof, asset class.
They offer investors a way to broaden their portfolio and opportunities for consolidating these spaces.
You can consider buying a leased building by a one-practice tradition group, which can then be acquired, and now you will go from a tenant with $ 5 million in assets to $5 billion quickly. This will increase the value of the real estate over the coming years.
Medical real estate not immune to challenges
Despite certain factors that favor the healthcare real estate industry and make it resilient to economic uncertainty, there has been a slowdown in transaction activity in 2023. It has been noticed that the volumes were down, and the portfolio transactions have been particularly impacted.
In contrast, single-tenant transactions and smaller transactions were better. The broader healthcare industry has also dealt with the changing macro environment.
The key factors included the availability of capital and cost and the skyrocketing labor costs. From a real estate perspective, the healthcare providers focus on the real estate strategy by evaluating these versus their impact.
The medical real estate industry’s performance will mirror 2023 in the coming year.
High-interest rates, construction costs, and uncertainty from the geopolitical context will continue to have a significant impact on the sector.
In addition, it is believed that healthcare will also be experiencing specific difficulties, just like any other type of commercial property in financing.
This will happen due to the higher interest rates and the maturing debt, potentially leading to lower values and distress in noncore assets. Healthcare receives similar financing to any other asset type, and the rates have affected everybody.
Many of the large institutional lenders have also pulled out of this space. It is not the most significant financing market for now, as other challenges are related to the labor environment.
Even though there is an increase in demand for clinical space staffing, those clinical functions have caused delays in the project.
Administrative space, on the other hand, has experienced a decrease in orders as providers are now looking to downsize due to the effects of remote working or flexible work schedules.
Surprisingly, many underused office buildings, including medical office facilities, have been converted. The new owners are rebranding the asset as a medical office building and ensuring better returns compared to the previous times.
What should we keep an eye on in 2024?
In the coming year, the healthcare real estate industry will continue to have a significant impact due to the higher interest rates.
Even though the consensus of the capital market is that the federal government will either get done with the tightening cycle one for all or completely close it, the prospective rate cuts in 2024 will have a more stable interest rate environment.
They will offer better underwriting and allow pricing to gain its fitting.
Unfortunately, the labor involvement will continue to experience challenges, and the labor cost may stabilize. However, the supply will continue to become a significant challenge for the industry.
If the experts are to be believed, physician shortages have already begun in the industry as the older specialists are retiring, and the number of new entrants has to match the level.
Nevertheless, the prospects for the sector are still alive.
The experts will continue to agree on one thing: there will be a rise in mental healthcare clinics. During the last few years, more funding was needed for such types of clinics.
Still, the rapidly changing environment of the facilities has made it a prominent and in-demand option.
Mental health providers are booming right now. In fact, with private mental health practices, there is a considerable demand, and it is opening up everywhere to keep up with the challenges people are experiencing these days.
Behavioral health will also majorly impact the MOB sector in the coming time. The specialists have noticed that investors, providers, developers, and lenders are all intrigued with the opportunities available in the space and are more interested in understanding subsectors and the financial advantages that come with them.
From a developer or investor’s point of view, no drastic changes will be seen in the market next year. Despite higher demand, financial challenges and staff shortages will continue to impact the medical office sector.
It is crucial to note that medical outpaced construction spending and reached its highest in 2023. The volume of projects climbed steadily since early 2022.
With a solid developmental pipeline and the available opportunities in various geographic markets, the construction volume and the sector are expected to be steady in 2024.
During the last year, the construction of various healthcare real estate projects was set to be completed in either 2024 or 2025. It is one of the most significant development backgrounds in the real estate industry.
The real estate developers are all starting to work in the medical real estate industry as it offers better stability even during economic downtime.
Overall, the healthcare sector has remained resilient even during the worst times possible and will likely continue performing better despite challenges that will affect the asset class.
If the investors can solve the problem of financing, they will be able to start with investment in the industry and make better returns from it. But one also needs to understand that it comes with challenges.
So, understanding the market in depth before taking any step is crucial to protecting the investment and guaranteeing returns.
Conclusion
Given the increasing demand for medical real estate, an investment here now will be fruitful. However, if you are facing challenges in terms of financing, then trusting Private Capital Investors would be the best. They are the best lending partners you can find in the industry. Their professionals are well-versed and knowledgeable.
They will understand your requirements and connect with the top lenders who can offer you the required financing at the lowest interest rate possible. With their expert help, you can be assured of getting the funding needed without delay.
Even during economic downtime, they promise the best rates and offers from the top lenders. So, get in touch with them today to get the required help.
