Amount of MOB Space Now Equals that of Hospitals
A variety of other HRE statistics were disseminated at Revista conference Jan. 27-29
The big shift that everyone involved in healthcare and healthcare real estate (HRE) has been talking about for years upon years has finally taken place, at least on the real estate side of the equation.
Perhaps for the first time, the two different models, outpatient and general acute care, are occupying about the same amount of facility space, at 1.5 billion square feet nationwide.
This fact was shared by Mike Hargrave, Revista principal, during the opening session of the Revista Medical Real Estate Investment Forum 2020, held Jan. 27-29 at PGA National Resort & Spa in Palm Beach Gardens, Fla. The firm’s sixth national conference attracted its largest crowd ever, topping 400 attendees.
“So, interestingly, this is the first time that we’ve done this update that the outpatient sector has been equal in size, at 1.5 billion square feet, to the inpatient hospital sector,” Mr. Hargrave said during a session titled, Medical Real Estate Facts, Trends, and Top Markets 2020. “And so this is … a trend that will probably continue into the future.”
Revista’s comprehensive data base of HRE facilities indicates that the United States is home to 5,479 general acute care hospitals with an aggregate real estate value of $616 billion, while, on the outpatient side, there are a total of 36,433 MOBs or similar facilities with an aggregate real estate value of $420 billion.
Combining those two. the total medical real estate market has a value estimated at about $1.36 trillion.
Mr. Hargrave and Hilda Martin, a Revista principal, presented numerous interesting facts for professionals involved in the HRE sector during the presentation, such as the size and scope of the medical real estate arena, what trends are taking place, and perhaps better understand how much and where, in general, potential investment opportunities lie.
For example, while the amount of space in the outpatient sector now roughly equals that of the general acute-care sector, hospitals and health systems still own a majority of the country’s outpatient space, at 52 percent of the square footage.
Third-party investors, on the other hand, currently own about a third of the outpatient, or medical office building (MOB) space, with the country’s healthcare-focused real estate investment trusts (REITs) owning about 11 percent, or 160 million square feet. Private investors, including firms in local markets, own a total of about 25 percent of the outpatient space.
Mr. Hargrave noted that the amount of MOB square footage continues to grow. Since 2014, the country has seen more than 20 million square feet of new MOBs delivered annually, a nice bump from the 17 million square feet delivered annually, on average, during the Great Recession.
He noted that 2019 was a good year for MOB completions, with nearly 25 million square feet being delivered.
“There’s a fair amount in the pipeline right now and we’re expecting, as of right now, a little over 30 million square feet to be completed in 2020,” he said.
MOBs continue to grow in size
In addition, the average size of new MOBs continues to grow as providers are offering more and more services into such buildings. The idea, of course, is that in delivering more care in outpatient settings providers are serving their patients with less-expensive services in convenient, one-stop facilities close to where they live or work.
“Since 2011 the average size of an MOB has really grown substantially … to a little over 52,000 square feet,” Mr. Hargrave said while showing a slide indicating that the average square footage of new MOBs built from 1980 to 2008 never topped 33,445 square feet. “And as of 2020, again this may change, but the average-size MOB scheduled to open is currently 68,000 square feet. So, we’re growing the inventory again, but through larger buildings that are being delivered to the market.”
As for the MOB investment market, Mr. Hargrave said Revista’s data shows the total sales volume in 2019 as being $10.3 billion, which is still a preliminary figure as more sales will come to light.
As of last week’s data, however, that is a lower volume than what has been recorded in each of the last three years: $11.88 billion in 2016, a record-setting $15.9 billion in 2017 and $12.3 billion in 2018.
“We’re seeing lower volumes (in 2019) compared to the last few years but continued strong pricing on the MOB side,” he said, noting that the average capitalization (cap) rate, or first year estimated return, of 6.4 percent in 2019 and an average price per square foot (PSF) of $328.
In sharing data about occupancy rates and rents, Mr. Hargrave presented statistics from the country’s top 50 metropolitan markets, where there’s a total of about 787 million square feet of space, or about 60 percent of the “nationwide stock” of MOB facilities.
As for occupancies, they remained strong and stable in 2019 in the top 50 markets, with quarterly averages ranging between 91.1 percent to 91.3 percent, Mr. Hargrave said. “It bounces a little bit back and forth but so far we don’t really see a measurable trend there.”
While the MOB absorption rate in the top 50 markets has remained strong in the last six quarters, it was especially strong in the fourth quarter (Q4) of 2019, when MOBs in those markets absorbed 5.8 million square feet of space.
As Mr. Hargrave noted, MOB construction also increased significantly in Q4 2019, with 6.9 million square feet being completed.
“I would expect that in 2020 we (will see) that both absorption levels as well as inventory growth levels, or completions, should continue to rise,” Mr. Hargrave noted.
Additional MOB sector facts
For the remainder of the data-filled presentation, Mr. Hargrave and Ms. Martin shared many other statistics and trends about the medical real estate sector.
Those included the following:
■ When it comes to MOB occupancy rates, the coasts rule. Over the last four quarters, the markets with the highest MOB occupancy rates are on the West and East Coasts. Baltimore, New York and Boston all have occupancy rates of about 94 percent, as do the Portland, Ore., San Francisco, Seattle and San Jose, Calif., markets, which have occupancies hovering around 94 percent. Jacksonville, Fla., bests all of the top 50 markets with a four-quarter average occupancy of 95.5 percent. The worst four-quarter rate is held by Las Vegas, at 83.8 percent.
■ Triple-net MOB rents have risen significantly since 2017. Average triple-net MOB rents in the top 50 markets were $20.97 PSF in Q1 2017 and have risen to $22.32 PSF as of Q4 2019. “But interestingly, the 90th percentile base rent has been growing at a faster rate than the triple-net rent, Mr. Hargrave noted about the top properties in the sector. “In the 90th percentile rent, the average has gone from $31.76 a square foot to $35 a square foot.”
■ Hospital real estate sales skyrocketed in 2019. According to Mr. Hargrave, the sales volume for hospital facilities in 2019 was $5.9 billion, a 69 percent increase over 2018. “This is mostly third party investors that are buying the real estate, but there’s also some hospital-to-hospital transactions here,” Mr. Hargrave noted, adding that the increase in volume in 2019 was driven largely by Birmingham, Ala.-based Medical Properties Trust (NYSE: MPW), “which had a very active year of purchasing hospital real estate. “
■ The number of MOBs under construction is quite a bit higher than a year ago. “There are 732 medical office buildings that are under construction as of the end of 2019,” Mr. Hargrave said. “That compares to 617 that were under construction just one year ago.”
■ Private equity investors continue to dominate the MOB acquisition market. In 2018, with the healthcare-focused REITs on the sidelines when it came to investing in MOBs, private equity investors made a whopping 68 percent of the purchases in the market, by volume, while the REITs accounted for just 19 percent – a low point in recent years. And while the REITs bounced back in 2019 by accounting for 33 percent of the MOB investment activity by volume, private equity investors still accounted for 55 percent of the volume. Health systems accounted for 10 percent of the MOB investment activity in 2019, down slightly from 11 percent in 2018.
■ More and more new MOBs are off-campus, hospital-affiliated. Ms. Martin shared statistics indicating that the country’s health systems are bringing more services closer to their patients. Of the 28 million square feet of MOB projects started in 2019, they are “overwhelmingly hospital affiliated and off campus.” She showed a slide indicating that 70 percent of the projects are off-campus, and 71 percent of all MOB projects are hospital-affiliated. “In the last few years … it’s always been a little bit more off campus than on campus, but it’s been running around the low 60 percent range. So, 70 percent is a pretty big uptick in moving away from the hospital campus.”
■ Repurposing MOB projects continues to gain steam. As more and more retail facilities, especially big box stores, are vacated, providers and developers are pouncing on opportunities to redevelop them as MOBs. “As I looked at the projects (under construction), I noticed a lot of repurposing of retail locations,” Ms. Martin said. “And this makes sense. I mean retail’s going through a lot of shifts and a lot of those … big box stores are closing. And there’s a lot of ways you can repurpose these. You could have warehouse, manufacturing. Medical is a big use for them. And there’s quite a few of them across the database.”■ Some new MOB projects are huge. While Mr. Hargrave noted that the average size of new MOBs continues to grow, Ms. Martin gave examples of how big some projects have gotten. For example, Parkland Memorial Hospital in Dallas is currently developing a 525,000 square foot MOB. “This one’s a good example because they are moving services from the old Parkland complex into this MOB,” she said. “They’re also going to have a new comprehensive breast care center there.” A slide she shared indicated that 77 MOB projects started in 2019 have more than 100,000 square feet of space, compared to just 47 in 2018.