The fallout from the COVID-19 pandemic has taken its toll on the country’s healthcare systems as well as the healthcare real estate (HRE) sector, even though the industry and property type continue to show resiliency.
For example, the occupancy rate of medical office buildings (MOBs) in the country’s top 50 markets has remained remarkably steady, finishing the second quarter (Q2) at a rate of 91.2 percent, which is slightly higher than the previous four quarters. Also, the absorption rate – at 22.2 million square feet on trailing 12-month basis — far exceeds any quarter dating back to Q3 2018.
Those statistics and overall good news concerning the medical office and healthcare facility sector were shared during Revista’s “Subscriber Webcast: Healthcare Real Estate Sector 2Q 2020” in late July. Providing information and news concerning the sector were Revista’s Mike Hargrave and Hilda Martin, both principals, and Mindy Berman, a managing director with the Capital Markets team with Jones Lang LaSalle Inc. (NYSE: JLL) and coleader of the firm’s national healthcare group.
“So, as we look at these trends (in the MOB sector), it really speaks of stability,” Mr. Hargrave said during the webcast. “The occupancy rate has been remarkably stable, as we’re really seeing no measurable impact quite yet in terms of any impact on occupancy from COVID.”
Ms. Berman added that “it’s a fascinating time to be in the healthcare sector during this period… COVID, like the financial crisis, is just a ratification of the MOB investment case: the durability, stability of the property class. There’s a contrast, if you will, between medical office and commercial office today, as it’s ‘a tale of two cities.”
Recent JLL research showed that the commercial office market ended Q1 with a negative absorption rate.
“Right now in commercial office, total vacancy is increasing and it’s now nearly 15 percent nationally,” she continued, “but that contrasts to medical office, which has stayed at 91 to 92 percent from the financial crisis, the depths of the financial crisis, through today.” While occupancies have remained strong, and MOB landlords have been collecting rents at strong rates, the MOB sales volume has certainly dropped during the pandemic.
In addition, while MOB construction starts surged significantly in 2019, of the “projects that were scheduled to be completed in the second quarter, more than 20 percent were delayed for 30 or more days,” Ms. Martin reported. “So you’ve got a lot of folks that are waiting for the opportune time to really open their buildings and put them into use, and what this is really doing is building up the pipeline, because the openings aren’t keeping up with the starts.”
As for MOB sales, Revista’s “preliminary data” for Q2 shows that MOB sales totaled $1.8 billion, a drop of about 45 percent from a year earlier, when sales totaled $3.3 billion in Q2 2019.
However, first-half sales in 2020 totaled about $4.7 billion, “so trending a little underneath what we were seeing last year,” Mr. Hargrave said.
Concerning the MOB transaction volume so far in 2020, Ms. Berman noted that, initially, “there was a lot of uncertainty … as in the short run it’s a little difficult to quantify and differentiate, because closings in the second quarter were really heavily weighted to deals that were initiated and priced pre-COVID. But … it’s fair to say that quality deals are in process, and by quality I mean core and core-plus deals are continuing during COVID and are closing.”
As would be expected, so far in 2020 the MOB investment market has been dominated by private equity firms. According to Revista, private investors made about 63 percent of all MOB acquisitions in the first half of 2020. That’s up from 56 percent in 2019.
The country’s real estate investment trusts (REITs) accounted for just 14 percent of MOB investment activity in the first half of the year, down from a 33 percent share of activity in 2019. Health systems have stepped up their activity so far in 2020, accounting for 17 percent of MOB purchases, up from a 9 percent share in 2019.
Even though the REITs were not active investors in the first half, Ms. Berman said she would not “count them out” for the remainder of the year.
“Now, there’s varying degrees of competitiveness with their cost of capital … (but) there are plenty that have capital to put to work… Medical office is a safe place to invest. The institutional managers which include their own discretionary funds as well as separate accounts with pensions and endowments are much more apt to hit pause, waiting for pricing discovery, but that’s not universal.”
As Ms. Berman had noted, Nashville, Tenn.-based Healthcare Realty Trust (NYSE: HR) picked up its investment activity after the close of Q2, making six investments totaling about $327.7 million in July.
If you missed the webcast – click here to access