MOB’s Low Vacancies, Longer Leases Boost Investor Appeal

Vacancies? What vacancies? As medical offices go, the idea of unleased space is practically a foreign concept.

Thanks to an aging population that requires more care and the need for medical office visits when a patient is ill or has a chronic disease, medical offices remain in demand. As a result, in the first quarter of 2023, the national medical office vacancy rate was only 9.2% — just under half the 17.5% vacancy rate for traditional offices. 

“From 2019 through the first quarter of 2023, vacancy in medical office properties has only risen 50 basis points nationally,” Marcus & Millichap reported in June.

The future outlook also seems healthy as the number of senior citizens increases and the amount of new medical office space being built remains limited. As of June, less than 12 million SF – or 1% of current inventory — was slated for 2023 delivery.

The report acknowledges, however, that availability depends on location-specific factors, such as resident demographics, existing local stock and metro-level construction pipelines.

Vacancy rates are especially low in warm weather markets which are experiencing an influx of retirees escaping cold-weather climates like Chicago or New York. The report cites a 190 basis-point drop in medical vacancy in the Dallas-Fort Worth area from 2019 to March 2023 “coinciding with a 17% surge in the metro’s age 65-plus cohort.” There was a similar pattern in other areas where the senior population grew more than 15%, such as West Palm Beach, San Antonio and Phoenix. Each saw vacancy falling by more than 200 basis points in the same period.

The strength of the medical office market is being bolstered by the entry of large retail chains such as Walmart Health. Walgreens has expanded into primary, specialty and urgent care following its $8.9 billion acquisition of Summit Health, while Amazon snapped up One Medical’s virtual, in-office and lab services. Other retailers entering the market could also boost demand for medical office space.

Post-Covid, medical office space has maintained an average sale price of just under $300 per SF. However, the report notes, dealmaking has slowed since the Fed began to raise interest rates. Uncertainty in the banking sector, which supplied over 75% of medical office financing in 2022, could also tighten lending.

On the other hand, medical office leases are generally signed for longer periods, reducing erratic swings, and healthcare is often non-discretionary. These factors, as well as telehealth and fewer labor challenges “could boost investor confidence in the long-term growth potential of the sector,” the report states.