Medical Offices Helping to Offset Rise in Overall Office Vacancy Rates

Strong demand for specialized space such as medical office buildings will help backstop availability in the office sector amid its challenges, even off-setting vacancy drops, according to the Marcus & Millichap 2Q National Office Report.

As with traditional office properties, transactions involving medical office assets slowed going into the first half of 2023, but not as severely as traditional office space.

“While most medical office tenants have incorporated some degree of virtual work, hybrid interactions supplement in-person visits rather than replace them,” according to the report.

With a better understanding of the future of telehealth, investors’ confidence in the segment has aided leasing activity.

The aging population is another backstop that supports medical office fundamentals, which suggests long-term space demand.

About 14% of all office space coming online this year is expected to service medical professionals.

The report said Riverside-San Bernardino, for instance, expects to maintain the lowest traditional office vacancy rate among major U.S. markets in 2023 – something that can be “partially attributed” to strong medical office fundamentals.

Medical office vacancy in that market was at 6.8 percent in March, and over 90 percent of 2023 deliveries fall in this category.

One potential headwind is developers assessing the cost of construction, the current lending environment, and ongoing labor shortages. Delivery delays emerged in the first half of the year and projects have stalled or scaled back.

Kari Beets, Senior Manager, Researcher, JLL, tells GlobeSt.com, “Due to the rise in vacancy in traditional office space, some properties near hospitals will consider a conversion to a medical office building or adding more medical tenants.”

Amber Schiada, Head of Americas Work Dynamics and Industries Research, JLL, tells GlobeSt.com, “Migration to Sunbelt and secondary markets accelerated during the pandemic, driven by lower costs of living and tax incentives, and the correlation with MOB development is fairly consistent. Health systems are looking to grow in areas where patient demand is rising fastest.”

She said outpatient visits will continue to drive demand for MOB space, as more services are conducted outside of hospitals. Outpatient volume is forecasted to grow 14.9% across the US by 2031 while inpatient volume is only expected to increase by 0.6%, according to the Advisory Board.

“Unlike a traditional office, healthcare has been minimally impacted by the pandemic, and occupancy levels in MOB assets are higher than they were, on average before 2020,” Schiada said.

John Wilson, president of HSA PrimeCare, tells GlobeSt.com that some traditional office buildings are dedicating a percentage to medical office space, which may offset some of today’s office vacancies, but it’s not a replacement for traditional offices.

“Healthcare development has slowed for several reasons, including, providers’ reimbursements from health insurance, Medicare and Medicaid are not keeping pace with the rising cost of labor and healthcare delivery,” Wilson said.