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Chicago METRO-566 W. Lake St. # 320 Chicago, IL 60661

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Please, Somebody Call a Doctor

Hospital affiliation is a strong indicator of MOB asset value

As late as 2011, property development was a pariah in investment and a recovery seemed years away. Then, in 2012, development shot up to nearly pre-recession levels. What is causing this boom? The most surprising is the explosion of investment dollars being funneled into outpatient medical office buildings (MOBs). Why would MOBs, barely even a blip on the radar before, suddenly be getting their own column in market analyst’s reports? Three reasons: increased anticipated demand, a traditionally stable marketplace investment, and record low development costs.

Increased demand

A good chunk of the increased demand is the aging baby boom population. Projections state the percentage of persons 60 or older in America is currently 18.3% and will hit 22.2% in 2020 and 24.7% in 2030 according to the Dept. Of Health & Human Services; Administration on Aging. This is important, because people 65 and older generally spend 3.3 times more on medical expenses than those working age.

“Buildings are going up left and right, and there are lots of opportunities in the marketplace,” said Paul D. Heiserman, SVP of a health care real estate brokerage firm based in Columbus, Ohio.

Politics is also playing a role. Obama Care is projected to increase the number of insured persons by 32 million. Some reports estimating a need of 1.9 square feet of office space for every one insured person. Skyrocketing the demand for medical real estate

The 2012 U.S. Supreme Court ruling upholding the Affordable Care Act ensures that millions will be added to insurance rolls in the next few years. Causing investors, including many real estate investment trusts, to develop a keen interest in medical office buildings.

A real estate developer and manager based in Indianapolis reported in January that it expects more building as high-acuity medicine and emergency services increasingly move off of hospital campuses.

This could represent an 11 percent increase by 2019, according to an Urban Land Institute report. Job creation among healthcare practitioners will likewise mirror this

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Chicago METRO-566 W. Lake St. # 320 Chicago, IL 60661

312-346-3200

expanded patient base.

The demand will, in large part, be filled by MOBs, not hospitals. First, outpatient care is generally less expensive. Second, insurance companies are trying to discourage long hospital stays, which is causing a migration of procedures from large hospitals to outpatient facilities. Third, as hospitals chase population by building satellite campuses in suburbs, outpatient facilities will pop up to service them.

A Traditionally Sound Investment

In MOBs, the proximity to a stable, creditable, and popular local hospital is a large factor in success according to our research. So a MOB in a good location will generally see higher occupancy rates and steadier prices than other office space. Their resiliency was proven in the Great Recession, which caused national vacancy rates in medical offices to rise a measly 1% and then quickly drop down to almost pre-recession levels. Similarly, the average cost of rent per square foot fell by only 10%, a drop of some significance but still desirable when compared to decrease in rent for other office space.

Record Low Construction

It’s no secret that the Fed is keeping interest rates low. Usually, that would result in increased investment, increased construction, and high construction costs. But with unemployment numbers staying high, office occupancy rates are low, meaning instead of investing in new office buildings; employers are leasing already constructed offices. Hence, construction costs remain low even as the funding is historically cheap.

If occupancy rates are low, why build? Because medical unemployment is expected to keep falling, and newer offices are the first to absorb returning workers.

Case in point, newer office space brought online during the recession is already seeing rent at a 25% premium to older properties. Especially since newly built properties tend to be either Leed Certified or significantly more energy efficient.

A Time to Build

As recently as last year, the recession had investors nervous about investing in new construction. But circumstances have changed, and now is a unique and potentially

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Chicago METRO-566 W. Lake St. # 320 Chicago, IL 60661

312-346-3200

profitable time to start investing in new medical offices.

Medical office building industry experts say the numbers indicate that future construction will be much greater for the foreseeable future than the 7 million square feet built in 2010, as reported April 21, 2011, by the Urban Land Institute, a nonprofit research organization.

Realtors say medical office space tends not to last long on the market. A statement issued Jan. 11 by Jones Lang LaSalle, based in Chicago, called medical offices “the investment darling.”

Estate Planning Tip for the Medical Field

 Medical office real estate experts say a building that can be bought and then leased back to the practice is an attractive investment for a buyer. The building will be harder to sell without a tenant.

Have a project you would like to discuss?

Debi Simon714-495-6825Simon09.d@gmail.com