The Medical Office Building (MOB) sector has shown its mettle through previous economic challenges. But with the onset of the Covid-19 pandemic and ensuing slowdown of elective surgeries and office visits many wondered if demand for MOB space would continue to move forward. We are now two quarters into the pandemic, and we are seeing great impacts on fundamentals in other CRE sectors such as office, hotels and seniors housing.
But so far, the MOB sector is again showing its strength with regards to broader economic challenges. We have seen the public REITs report steady occupancy rates and most are reporting near 100% of rents being collected from MOB tenants. A quick review of Revista’s Top 50 Metro area fundamentals support these statements. The TTM occupancy rate in the top 50 metro areas was 91.3% as of 3Q20. That is essentially flat compared to 2Q20 and up 10 basis points from one year ago (3Q19). Stronger levels of absorption seem to be driving the occupancy trends. Absorption (the change in occupied space from one period to the next) registered 16.7 million square feet (MSF, TTM basis) in 3Q20. This compares to 13.8 MSF (TTM basis) delivered as of 3Q20. The result is steady to slightly higher occupancy. What is driving absorption? It is likely a combination of higher leasing renewal rates and highly occupied MOB construction hitting the markets.
While we still have more economic and health challenges ahead, it is encouraging to know that the MOB sector is once again proving its strength and posture.