The demand for medical office buildings continues to remain strong. If fact, it couldn’t be in better shape despite fears of the impact from telemedicine and given the demand for increased healthcare. The industry is poised to grow even more over the coming years.
The healthcare segment is known for its sign of stability and resistance to recessions. These trends are expected to increase through next year and beyond. Development of new medical office buildings continue, making these properties on the market highly sought after. They are being scooped up quicker than ever before and that is coming off record highs in sales volume and pricing in 2021.
None of this demand is a surprise giving the aging senior population along with migrations and relocations that have picked up since 2020. Did you know that medical office absorption hit a record in 2021 at 18.5 million square feet on a trailing fourth basis? That’s nearly two times the typical rate going back to 2019 and previous years.
Part of the reason for this is because telemedicine and Facetime along with other avenues of technology simply aren’t enough since they are not diagnostic. There are certain things within the medical industry that simply can’t be done over the phone. Although telehealth is an important component to help deliver care, it will never be something that replaces medical offices completely.
The State of Medical Office Occupancies
One of the best things about owning your own healthcare practice is that even when other industry sectors are down and out, healthcare continues to grow. Even medical office rents historically grow at a steady rate of 2 - 3% per year, year over year. Especially, as vacancy remains tight and inflation is relatively high, we can expect to see rates continue to run higher than it has been historically. This can make things for an interesting decision regarding whether or not it makes sense to either own or lease a building.
Rates are increasing for a variety of reasons. A main reason for this is because of the rising cost of construction and increased tenant improvements. Entering 2022, average net asking rents for medical office space increased by 1.7 percent over 2021 to $22.61 per square foot, which is a new high.
The Medical Office Climate
The medical office sector is building off a record year in 2021 for sales that resulted in $15.4 billion in transaction volume. The value of these types of healthcare offices is truly at an all-time high, making it an excellent investment for practitioners