Aging Population Boosting Demand for Medical Office Buildings

An aging population is boosting demand for medical office properties, reported CBRE, Los Angeles.

Healthcare providers seeking to cut costs and new technologies coming online will also boost medical office demand, the CBRE U.S. Medical Office Buildings: A Cure for Market Volatility report said.

The Census Bureau predicted the 65-plus population will nearly double by 2055 to more than 92 million–nearly 23 percent of the country’s total population by that time.

“The steep increase in the 65-plus population and anticipated greater need for in-office physician services by this group signals a continued increase in demand for healthcare services and medical office space in the years ahead,” said CBRE Americas Head of Office Research Andrea Cross.

Cross noted the overall U.S. medical office building vacancy rate fell to 8 percent in the first quarter, down nearly 300 basis points 2010 and significantly below the vacancy rate for the overall office market, which reached 13 percent in the first quarter.

“The pace of vacancy rate decrease accelerated in recent quarters due to stronger user demand, likely driven by the aging U.S. population and increase in the ranks of the insured,” the report said. “The national vacancy rate decreased by the same amount during the past nine quarters [140 basis points] as during the prior four years, despite a slight increase in new medical office supply during the past few years.”

CBRE noted investment in the U.S. medical office sector increased “substantially” over the past seven years. Total investment volume in medical office buildings exceeding 10,000 square feet rose from under $4 billion in 2010 to more than $10 billion last year. Last year’s total investment exceeded the prior peak, $7.3 billion in 2006, which indicates increased optimism in medical office rather than simply post-recession improvement.

“The evolution of medical technologies is boosting demand for newer [office] product with the infrastructure capable of handling cutting-edge devices and systems,” said CBRE Executive Managing Director for Healthcare Jim Hayden. “Medical office space that helps providers minimize costs and maximize outcomes–including buildings that support collaboration and can accommodate new technologies that help them achieve these goals–will likely remain in favor.”

Chris Bodnar, Executive Vice President with CBRE Capital Markets, said as investor appetite for healthcare-related real estate has grown, medical office buildings have emerged as the most popular property type within the sector. “As yields for traditional real estate asset classes have compressed in recent years, new capital sources–including foreign capital–have entered the medical office sector in search of stability to hedge against any potential correction in the global markets.”

Medical office cap rates have consistently decreased since reaching an 8.3 percent high in mid-2010. They recently fell to 6.8 percent. Regionally, average cap rates have been lowest in the west over the past seven years, 60 basis points below the U.S. average.

Comparatively moderate regional differences are an attractive feature of medical office as an investment class, CBRE said. Demand for healthcare is everywhere, so investors can look outside primary markets.