Medical Office: Asset Fundamentals Strong

Ian Ritter is online content manager at GRS Group

Ian Ritter is online content manager at GRS Group

Often thought of as a niche commercial real estate property type, the medical-office sector has actually become much more than that. After all, healthcare REITs were the third-most-traded sector in commercial real estate.

Newmark Grubb Knight Frank recently put out an exhaustive report on the the healthcare sector of commercial real estate. We took some time to comb through it and are outlining the key points of the study as it relates to commercial real estate.

Leasing: Though we aren’t at pre-recession levels yet, leasing in the sector is strong. Vacancy rates dropped from 12 percent in the fourth quarter of 2009 to 10.6 percent in last year’s same period. Vacancy was lowest in San Francisco, at 3.5 percent, followed by Pittsburgh, at 5.1 percent.

Absorption: Net absorption came in at 7.4 million square feet, which overran the new developments that hit the market at 5.4 million square feet. Though annual absorption between 2009 and 2014, averaging 6.6 million square feet, was less than the average of 13.7 million square feet between 2003 and 2008, tenants are paying higher rents. Assets built from 2010 and on gained 70 percent of last year’s total absorption.

Construction: Though construction was down in 2014, it is ramping up, and more new developments are expected over the next few years. Boston is an especially hot locale for the medical-office sector. There is one-million square feet in the pipeline in that city.

Rental Rates: Last year medical-office rental rates increase in  28 of the 42 markets analyzed by NGKF. Since the first quarter, they have gone up 3.5 percent nationally. The highest asking rates were in New York City, at $62.20 per square foot, and San Francisco, at $41.90.

Sales Volume: This is impressive. About $9.5 billion worth of medical-office assets were traded last year an increase of 25 percent from 2013. There could be more sales on the horizon. Health-care providers own a majority of the real estate in the sector, and with tightening budgets, they are likely going to want to sell those assets.

What do you think about the medical-office sector? Is it a more relevant product type as of late, or is it still a commercial real estate niche?

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