Investors Maintain Confidence in Medical Office Market Despite Uncertain Healthcare Law Changes
Changes to healthcare law uncertain, but strong demographic trends persist. Healthcare reform has been a major topic of the new administration, and while efforts to repeal and replace the Affordable Care Act have thus far been unsuccessful, many legislators continue to press for change. This ongoing uncertainty about healthcare will likely persist for an extended period but positive, demographic factors continue to support a growing medical office market. Baby boomers are aging and requiring more services every day, and a quick-paced lifestyle drives demand for retail clinics and telehealth services.
• By 2030, the 65 and older population will rise by more than 20 million individuals, accounting for over 20 percent of the United States total population. The aging population places additional pressure on medical providers as demand for services rises.
• Millennials are seeking healthcare options primarily in retail clinics, urgent care centers, and freestanding emergency rooms. Rural, underserved populations are gaining better medical care as they become more familiar with the use of telehealth services.
• Healthcare providers continue their push into communities by taking space in outpatient medical office buildings that are coming online outside of traditional hospital campuses. Micro hospitals are also an emerging trend, and more of these small-scale inpatient facilities will pop up in underserved populations in the years to come.
Large portfolio deals make waves in medical office investment activity. Proposed changes to healthcare legislation have not thwarted investment in medical office space. Investment activity remains healthy as investors target the segment for its strong demographic factors, prompting significant portfolio deals in recent months. Investors choosing to sell now are met with a high degree of interest, and the majority of deals taking place involve multiple properties. Smaller private buyers and new entrants to medical office investing are searching for value-add deals as competition for stabilized properties is intense.
• Private equity funds are partnering with medical office investors to build portfolios. This opens the door for smaller groups to gain numerous properties at a lower borrowing cost than finding capital sources for each individual transaction.
• Demand for both on- and off-campus medical office buildings remains strong despite the uncertain state of the healthcare law. Investors remain interested in stabilized assets located in growing
markets with healthy economies.
• Stabilized on-campus medical office properties in prime markets are trading at cap rates in the 5.5 percent to 6.0 percent range, while comparable off-campus deals are fetching initial returns
approximately 50 basis points higher. Assets in need of repositioning or located in secondary or tertiary locations can trade up to 200 basis points higher.
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