Medical Office Building Investment Stumbles

It’s been a good growing time for medical outpatient buildings. “Demographic trends, technology and reimbursement changes are continuing the shift toward outpatient care, driving demand for outpatient medical buildings,” a JLL report read. “Growing specialties are taking a more holistic view of lifelong health and wellness.”

However, according to CBRE, investment in medical office buildings overall took a stumble in the first quarter of 2024. MOB investment fell by 21% quarter over quarter to $1.6 billion, which was down 7% year over year. That meant the MOB investment volume fell by 48% compared to the 2019-to-2023 period.

According to CBRE, high interest rates (along with accompanying high rate cap costs) and inflation (which hits taxes, insurance, and utilities) have limited medical office investment activity. Though, to be fair, investment volumes on most types of CRE properties have sharply fallen over the last two to three years.

Properties sold for about $288 per square foot, up only a dollar from the fourth quarter of 2023, but there had been six consecutive falling quarters. Still, they are 43% above the $202 per square foot that traditional non-medical offices get. And currently, MOB prices are far below the 2022 Q2 heights of $356.

Cap rates have been rising for the last six quarters, ending in this past Q1 at 7.0%. That is still below the 7.5% for regular office stock. The reason for the increase over time is high interest rates and inflation. It’s harder to make a deal work, so something has to give, like price.

Phoenix was the top market for trailing-four-quarter MOB investment volume in Q1 with $373 million, followed by Atlanta with $366 million and Greater Washington, D.C. with $346 million. “Phoenix was the top market for trailing-four-quarter MOB investment volume in Q1 with $373 million, followed by Atlanta with $366 million and Greater Washington, D.C. with $346 million.”

The bottom five markets were Milwaukee ($121.5 million); Dallas ($116.3 million); San Diego ($111.4 million); Raleigh/Durham ($107.2 million); and Portland, Oregon ($93.7 million).

Out of the top 20 markets for investment, 13 saw year-over-year increases. But with a month-over-month view, half of the markets were up and the other half were down.

Lending activity was off by 11% in the first quarter. Alternative lending groups were the primary lenders to the industry, taking 47.2% of the lending. Banks had 22.7%; life companies, 21.3%; and CBRE, at 8.8%.