The report finds there will be continued strong demand for medical office space and strengthened investor appetite driven by higher yields, low interest rates and stable tenants. The retail market is also expected to continue to see a boost as medical clinics and urgent care centers lease space in shopping centers where traditional brick and mortar retailers have left vacancies.
“In a push to lower costs, healthcare providers have been shifting care away from hospitals to outpatient facilities for several years. This ongoing movement further increases demand for medical office space,” said Mary Beth Kuzmanovich, National Director of Healthcare Services for Colliers. “Existing facilities will have to be renovated and new buildings will need flexible designs to keep up with emerging healthcare technology, which is transforming how and where patient care is delivered.”
Despite focused efforts to reduce healthcare costs, Colliers’ analysis finds that costs will continue to rise. A larger pool of actively insured Americans, due in part to the Affordable Care Act (ACA), combined with an ever-growing aging population, is driving health expenditures higher—topping $3 trillion in 2014 and projected to reach nearly $5.5 trillion in 2024.
As a result, hospitals and healthcare systems are actively seeking more effective solutions to cut costs and reduce spending, while improving the quality of care. The “retailization” of healthcare continues to gain ground as an answer to lowering costs and providing more accessible locations. Also, mergers and acquisitions of physician practices, hospitals and healthcare systems are widespread as larger, combined organizations pursue greater negotiating leverage and improved efficiencies.
Even with these challenges in the healthcare industry, investor demand for quality assets with credit tenants remains strong. 2015 has been a banner year for medical office sales and demand should remain healthy through 2016. Investors not traditionally accustomed to investing in medical office properties have been drawn to the sector through the availability of debt, shrinking yields in other asset classes and demographics that point to massive growth in demand.
Additional key findings from Colliers’ report include:
- Medical Vacancies Declining: Demand for Medical Office Buildings continues to be robust. Through three quarters of 2015, the vacancy rate stood at 9.5 percent, representing a drop of 30 basis points from the same period in 2014, 130 basis points down from the peak in 2010.
- Notable Highs in Construction: Over the last several years, the square footage of medical space under construction has been restrained. However, new medical office construction is expected to surpass 38.0 MSF by year-end, with a total value of $18.3 billion.
- Retail Clinics Projected to Double: Healthcare systems are attracted to the lower costs associated with operating in existing real estate footprints and keeping minor medical issues out of expensive emergency departments. A study by Accenture finds the number of retail clinics is projected to nearly double from 1,418 in 2012 to 2,805 in 2017.