Medical office buildings (MOBs) are big business. In the race to deliver and absorb this product type, Chicago didn’t just lead the country, it recorded numbers nearly equal to the next two markets combined.
Through the twelve months ending with the second quarter of 2019, Chicago logged 915,000 square feet of positive net absorption according to a new report from CBRE. The next-largest markets, Atlanta and New Jersey, were well behind with 557,000 square feet and 482,000 square feet, respectively.
“Chicago is one of the most competitive healthcare environments in the country and systems are continually trying to increase market share by further penetrating and expanding within the communities,” said Jon Springer, executive vice president with CBRE. “This expansion activity has led to robust leasing and development of new, Class A medical product.”
Institutional investors have favored medical office real estate more and more throughout this cycle, drawn to the strong fundamentals of the asset class. High transaction velocity has, in turn, held capitalization rates low relative to conventional office space.
Following this redoubled demand has been a surge in development. Chicago leads the nation in MOB completions as well with nearly 750,000 square feet of deliveries in that time period—25 percent higher than any other market in the country. And still medical office vacancy stands at a respectable 10.1 percent, which was down 1.3 percent over the previous year.
“The localized strategies help the system deliver better care in the communities, while providing a better patient experience,” Springer said. “This activity should continue for the foreseeable future.”
Medical office properties have enjoyed a sustained increase in average asking rents over the past six years as an aging population and other demographic factors escalate demand for healthcare services. As a result, CBRE data shows that MOB transaction volume is currently 50 percent higher than before the recession. Those groups showing increased interest in this asset type include REITs, as well as foreign and domestic institutions.
“There is a continued rush by capital to this property sector,” said Ian Anderson, CBRE Head of Americas office research. “This is a generational, secular trend driving interest in this type of real estate. The median age of the American population is gradually increasing, and healthcare as an industry is moving more toward treatment at outpatient centers and medical offices than at hospitals.”