The COVID-19 pandemic has ‘justified’ the investment case for the product
NATIONAL – Ever since the onset of the COVID-19 pandemic, professionals involved in the medical office building (MOB) sector have predicted that the property type would hold up as well as almost any other type of investment vehicle.
A new report from Jones Lang LaSalle Inc. (NYSE: JLL) indicates that MOBs might be faring even better than anyone would have expected.
JLL’s most recent “Medical Office Perspectives” newsletter, which is issued by the JLL Healthcare Capital Markets group, indicates that not only did MOB sales remain strong in the first half of the year, but with a volume of $5.5 billion — according to the firm’s healthcare and research teams — they exceeded the first-half volume of 2019 by 10 percent.
As JLL notes, this increase in sales is a “noteworthy accomplishment in the midst of the global pandemic.”
“The COVID-19 pandemic has ratified the investment thesis for MOBs that we have long said was true,” Mindy Berman, senior managing director of JLL Healthcare Capital Markets, tells HREI. “For the last couple of years, as we entered the peak cycle for commercial real estate values, investors have been raising capital to invest in MOBs as a defensive play. And now, with this crisis upon us, that thesis, as I noted, is proving to be justified.”
And despite the fact that the pandemic looks to be continuing well into the second half of the year, JLL notes in the newsletter that the MOB “sales volume typically accelerates in the second half of the year. This suggests that 2020 total sales are on track to exceed their 2019 total, despite the uncertainty associated with the pandemic.”
Ms. Berman and a number of other MOB sales brokers have indicated that they know of a number of portfolios that are expected to hit the market in coming months, backing up the notion that sales could top 2019. As a result, sales could exceed $10 billion for the sixth straight year – as has been the case according to data compiled by two of the sector’s major research firms: Revista and Real Capital Analytics (RCA).
It should be noted that while JLL Research uses sales statistics from RCA, it compiles its own totals through additional research and its own data.
JLL also notes that as MOBs have continued to gain favor among real estate investors, they have, so far in 2020, taken a larger share of the overall office investment sector than perhaps ever before.
“Enthusiasm for medical office investment in the first half of 2020 stands in contrast to overall office sales, which declined 38 percent year-over-year during this time. Remarkably, at 14 percent, the share of all office sales represented by medical office in the first half of 2020 doubled its historical average rate of 7 percent. This outsized share is explained by the fact that the durability and dependability of the medical office sector and its cash flows are more frequently sought out during weaker economic periods; medical office enjoyed an 11 percent share in 2009, during the depths of the financial crisis.”
Perhaps the only thing that could hold back MOB sales, according to Ms. Berman, is a lack of supply to meet investors’ appetites for the product type.
“Ever since the Great Recession, there has been more consolidation, both among health systems and in health systems acquiring physician practices, and this means that there are more ‘core’ facilities, larger MOBs occupied by strong health systems,” Ms. Berman notes. “And with construction deliveries remaining modest and health systems and providers continuing to own about 65 percent of the product type, this means that there are not enough MOBs to meet investor demand. And, we have actually seen more reverse monetizations in which health systems buy MOBs they occupy than health systems selling such assets.”
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