February 28, 2019
John B. Mugford

Revista principals note that MOB sales, same-store NOI growth, are reflections of the sector’s steadiness

SAN DIEGO– For the fourth straight year, medical office building (MOB) sales in 2018 topped $11 billion, providing another indication that the sector continues to garner strong demand from a wide and ever-growing number of investors and investor types.

The $11.2 billion in MOB sales recorded in 2018 represented a drop from the record-setting volume recorded in 2017, when the sales volume totaled $15.8 billion but was fueled, in large part, by Duke Realty Corp.’s disposition of its entire MOB portfolio for an estimated $2.5 billion.

And yet, despite the drop in sales, the MOB sector remains a modicum of steadiness, as indicated by the fact that the average, nationwide same-store net operating income (NOI) growth for MOBs stood at 2.4 percent in the third quarter (Q3) of 2018. The figure represented a slight decrease from recent quarters, when the average NOI growth peaked at 3 percent during a handful of quarters in 2016-17.

This information and other data concerning MOBs was presented during the “Medical Real Estate Industry Update” at Revista’s recent Medical Real Estate Investment Forum held Feb. 6-7 in San Diego. The fifth annual conference, which emphasizes data and continues to grow, attracted 375 attendees.

Presenting the material during the “update” were Revista Principals Mike Hargrave and Hilda Martin, who provided plenty of data highlighting a wide range of MOB fundamentals, such as occupancy rates, investment sales trends, development and construction numbers and other interesting information, such as a recent spike in hospital construction.

As a slide appeared on the big screens during the conference highlighted the steadiness of same-store, MOB NOI growth in recent years, Mr. Hargrave told the audience, “I would imagine this is why we’re all here,” adding that “NOI growth for MOBs remains remarkably consistent over the years, ranging from between 2 percent and 3 percent year after year, even coming out of the Great Recession.”

When it comes to MOB sales volume in recent years, Mr. Hargrave noted that “prior to 2014, when sales were $8.9 billion, the yearly totals were about $5 billion. But since 2015, the volume has topped $11 billion each year, meaning about 3 percent of the total inventory traded. That’s in line with other commercial real estate sectors and bodes well for the future of transactions in this industry.”

While MOB fundamentals remain steady year after year, Mr. Hargrave said that capitalization (cap) rates, or first-year expected yields, are starting to creep upward after a long period of record lows.

The average MOB sales cap rate in 2018 was 6.5 percent, up from an all-time low of 6.1 percent sustained from Q3 of 2017 to Q1 of 2018.

Interestingly, Revista’s data indicates that the rise in cap rates is being fueled by transactions involving what the firm considers “non-core” assets. For those sales, the average cap rate has risen from a low of 6.4 percent in Q3 2017 to 7.1 percent in Q4 2018.

On the other hand, cap rates for the top properties, considered by Revista to be “core” MOBs, have hovered right around 5.5 percent since Q2 2017.

Revista’s data also indicates that 874 HRE properties, with a value of about $70 billion were under construction as of the end of 2018. That includes a variety of project types, including MOBs, hospitals and others.

Mr. Hargrave noted that about 21 million square feet of new MOB space, with a value of about $9.4 billion, is slated for completion in 2019, about the same as in 2018.

“This is the story that we’ve been talking about year after year, the retailization of healthcare delivery and the need of the health systems to get out into the communities,” Ms. Martin told the audience.

She added that hospital construction, on the other hand, will see a large increase in projects, square footage and dollar value in 2019. Revista’s data shows that 39.3 million square feet of hospital space, be it in new facilities, replacement projects or expansions, with a value of about $28 billion, are scheduled to be delivered in 2019, making strong increases from recent years, including a 72 percent increase in square footage over 2017.

“All of these new hospital projects are, as we all know, contradictory to the recent conversation that the country needs fewer hospitals and fewer beds as the shift to an outpatient model continues,” said Ms. Martin.

“So why is this happening?” she asked rhetorically. “Well, one has to remember that the typical hospital project takes 731 days to complete from the groundbreaking to the completion. So, many of these were planned in 2014-15, in the early days of the ACA (Affordable Care Act), and there was a need to meet the demands of an aging demographic, a need to add new technology and a need to recruit more talent with new and better spaces.”