RevistaMed

The MOB Scene

Which Markets have the Largest Construction Pipeline Relative to Their Size?

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Typically, when we report the top construction markets, markets are ranked by the total square footage that is under construction. In the table below we are instead sorting by this number relative to the market size. This highlights some of the smaller markets that have a lot of supply growth in the pipeline. Madison, WI . . .

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Medical Office Inventory Growing at a Slower Rate

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Over the past year or two, new construction projects have faced the headwinds of elevated labor, material, and financing costs. Because of this, we are now seeing inventory growth running at a slower pace. The graph below shows the amount of MOB square footage that finished construction on an annual basis, as a percentage of the inventory. The average over the past 10 years is about . . .

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Cap Rates Move Up Again in 4Q2023

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The average cap rate for medical office building (MOB) transactions moved up to 7% in the last quarter of 2023. This is up 90 basis points from one year prior. A pricing gap between on and off campus MOBs remains, with on campus coming in 30 basis points lower at 6.7%. Despite the strong underlying fundamentals, investor demand is being limited by stringent capital conditions . . .

Read moreCap Rates Move Up Again in 4Q2023

Has Construction been Concentrated in Larger or Smaller Markets?

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2023 was a slow year for medical office developments, with around 12 million square feet of projects that broke ground. This is about 45% lower than the average over the past decade. However, 12 million square feet is still a substantial increase in supply, and it is interesting to observe how different markets are reacting. In the graph below

Read moreHas Construction been Concentrated in Larger or Smaller Markets?

Rate Cuts on the Horizon

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For all of 2023 investors have been waiting for more clarity on the monetary policy path. The FOMC meeting last week provided what many have been waiting for. The median projection for the federal funds rate is now 4.6 for the end of 2024. This leaves room for three 25 basis point cuts throughout the year. While not shown in the graph below, the full range of forecasts for 2024 is 3.9 – 5.4. This indicates that all the meeting participants are predicting no rate hikes in 2024, which is a first for this year.

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While MOB Rent Levels are Strongest in Coastal Markets, Rent Growth is Fastest Elsewhere

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For healthcare tenants in costal markets such as Los Angeles, San Jose or San Francisco, it is understood that higher rent levels come with the territory.  Historically hard to build, high demand markets on the coasts have allowed rent levels to build over the years.  In fact, the 2 most expensive rent markets (of the top 50 metros) for MOBs in 3Q23 are San Jose ($45.81 avg NNN rent) and San Francisco ($41.00 avg NNN rent). 

Read moreWhile MOB Rent Levels are Strongest in Coastal Markets, Rent Growth is Fastest Elsewhere

MOB Fundamentals Remain Steady

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Development and acquisition activity is currently suppressed in the medical office sector. However, this does not reflect a wavering in the underlying performance of medical assets. The graph below is from our 3Q23 Industry Fundamentals Report, which tracks a group of large medical office portfolios containing approximately 150 million square feet. It shows the average NOI per occupied square foot, which has continued to tick up, now at a level of $23.20.

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Demand for Outpatient Space Growing Faster than Supply

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It is no secret that many healthcare services and procedures are increasingly moving towards an outpatient setting. Advances in technology, cost efficiencies and other factors have enabled this move which has led to consistent and steady growth of demand for outpatient space, and the underlying supply of such space. Revista normally tracks the supply/demand picture through its reporting of absorption, completions and occupancy rates.

Read moreDemand for Outpatient Space Growing Faster than Supply