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Home / Construction/Development / Is MOB Rent Growth Correlated to Occupancy?

Is MOB Rent Growth Correlated to Occupancy?

February 26, 2020 by Mike Hargrave Topics: Construction/Development, Industry News, Leasing/Property Management, Policy/Legislation

Classic economic theories establish a clear relationship between supply and demand for many goods and services.  In real estate circles the theory says that as prices rise, demand (or occupancy) should fall.  This theory has been validated within several commercial real estate sectors such as the hotel, office and multifamily sectors.  But what about the medical office sector?  We looked at the question using our metro level occupancy and same store rent growth information.  We were seeking to answer whether higher occupancy rates were correlated to higher levels of rent growth.  We looked at the average MOB occupancy rate and average MOB SS rent growth across the top 125 metro areas over each of the past 4 quarters ending with 4Q19. 

What did we find?

We found through this analysis there is little correlation between higher same store rent growth and higher occupancy rates.  See the graph below but the R-Squared is less than 1%.  As examples there are a few metros that exhibit a classic supply/demand relationship:  Baton Rouge (top right) has past 4 quarters average SS rent growth over 8% while its occupancy rate is above 95%.  There are also metros that do not exhibit the relationship:  Las Vegas (furthest to bottom) has past 4 quarters average SS rent growth of 4.4% and the lowest occupancy rate of the top 50 metros of 83.8%. 

what does this mean? 

Does this mean we can expect more revenue growth from lower occupied buildings?  Maybe but in the case of Las Vegas we have a very active market with a great amount of general growth.  In fact, Revista data tells us that 6 MOB projects and 13 hospital projects comprising over 2 million SF has recently completed.  At the same time several buildings are marketing space available.  This type of growth could lend itself towards higher levels of rent growth.

On the lower rent growth side, many leases are longer term in nature so the higher occupied markets could contain more longer-term leases with baked in CPI type growth in rents.

In either case, its food for thought.  And rest assured Revista will continue to look to answer questions such as this.

Average MOB Metro Level Occupancy Rate vs. Average SS Rent Growth; Past 4 Quarters, Top 125 Metros, source: Revista

Mike Hargrave
Mike Hargrave

Other Articles by Mike Hargrave:

    • Lenders to the Medical Office Sector Signaling Caution, Lower Volumes
    • Inflationary Pressures Impacting the Revista MOB Industry Fundamentals Report
    • MOB Transaction Volume Sets Quarterly and Annual Volume Records in 1Q22

Previous Post:Qualified Opportunity Zones Added to Revista
Next Post:Amount of MOB Space Now Equals that of Hospitals

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