Net Retail Healthcare Sees the Brakes Pumped

A report from brokerage Marcus & Millichap says that medical office construction is slowing as “healthcare retailers shutter.”

They haven’t been the only ones to notice a contraction. CBRE noted last month that 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.

Marcus & Millichap said that there is some expansion in medical office in Texas, but that Houston alone is seeing 22% of all national delivery of medical office.

“While this creates short-term pressure for Houston, the metro will note the third largest increase in the 65 and over population by 2034, tempering the long-run impact,” they wrote. “A well-dispersed pipeline outside of Houston will help limit the national vacancy increase to only 30 basis points this year as overall completions step down from 12.5 million square feet in 2023 to about 10 million this year.”

“Going forward, construction may ease further, given rising material and labor costs,” Marcus & Millichap wrote. “To contend with higher expenses, more future projects may involve traditional office conversions.”

The slowdown hadn’t been helped much by the mixed results seen in the likes of Walmart, Walgreens, and Rite Aid making big changes in their health clinic offerings. “As these operations downsize, providers could see opportunities to fill demand gaps and open offices in multi-tenant spaces.”

Medical office has continued to trend down, according to the report, given elevated interest rates. Year-over-year in March there was a 40% drop in transactions. As has been true in other property types, the sales that have taken place have been in smaller properties of $1 million to $10 million in size. Financing is somewhat easier to manage, especially in alternatives like seller financing and 1031 exchanges. There is also less perceived risk in smaller deals.

Deal patterns were also more similar to pre-pandemic markets. In the 12 months ending in March, half of eight geographic regions — Central Plains, Midwest, Northeast, and Southeast — saw more deals above the pre-pandemic five-year average.

Mid-Atlantic, Mountain, and Southwest regions were down from the five-year average from 3% to 12%. The Pacific region was the one that was hardest hit, seeing transactions drop by almost 33%. “Metros with limited development and lower vacancy rates will likely continue to be sought out,” they wrote.