1. Americans are Getting Older
Americans are living longer these days, which means seniors will soon start to make up a larger portion of the population. According to the Urban Institute, the number of Americans aged 65 and older will more than double over the next four decades, reaching 80 million in 2040. Older Americans will continue to provide sustained demand for medical care, often in more affordable, out-patient settings, which helps to strengthen the medical office sector. In addition we will also see a continued uptick in demand for skilled nursing centers, nursing homes, and assisted living communities, which plays right into our next reason to buy healthcare real estate...
2. Demand Continues to Outpace Supply
Industry experts predict only 1.0% growth in inventory this year, with 70% of projects slated for completion already having tenants in hand. Absent new development, there’s a growing supply and demand imbalance that has resulted in increased competition for the space that does exist. This competition is two-fold, among medical office tenants looking for space (and therefore, willing to pay premium rents for longer lease terms) and among investors looking to buy medical office properties (in turn, driving up prices). Given the sector’s otherwise strong fundamentals, the limited supply of medical offices makes the space especially attractive to investors looking to add real estate to their portfolios. This is true EVEN in the face of an economic downturn due to the fact that...
3. Healthcare Real Estate is Much More "Recession-Proof"
Over the past decade, there have been at least two major shocks to the real estate market: the first was the 2008 housing market collapse that caused real estate values to bottom out in 2009-2010. The second, more recent, shock was brought on by the COVID-19 pandemic. In both instances, investors faced a real threat of default in situations where tenants stopped paying their rents on time. Yet during both recessions, Medical office real estate performed (and recovered) faster than other asset classes and proved to be especially resilient. This is due to the fact that unlike other real estate assets like retail and hospitality, healthcare is a needs-based industry. Regardless of how the economy is performing, Americans (especially older Americans) will continue to need medical care. They cannot forego certain treatments or procedures the same way people might forego a latte or vacation when the economy dips. Owners of medical office also benefit from more a much more stable tenant base than most other asset classes because...
4. Medical Office Tenant Retention is Strong
Medical office tenants offer much more stability than traditional office tenants and are not as likely to up and leave. This is partially due to the high up-front buildout costs of their space. Specialized equipment, HVAC systems and the like are expensive and cannot be easily replicated elsewhere. Given that so many medical office tenants invest heavily in their space, they tend to remain in place for longer periods of time. Leases generally average somewhere between seven and 15 years—a long period for which investors can expect dependable cash flow. In addition, medical office tenants generally have strong ties to the community and want to provide care to their patients in a consistent, convenient location. This makes them more likely to re-sign leases than traditional office users whose physical location is perhaps less important. Which brings us to our next point...
5. Medical Real Estate Attracts Reliable Tenants
Not only do landlords benefit from stronger tenant retention, as noted above, but these tenants are generally very credit-worthy and have a strong track record for on-time payments. Hospital-affiliated tenants tend to be the most credit-worthy, but smaller physician-owned practices often have a solid credit history as well. Leasing space to a few high-credit, long-term tenants is a good way for investors to attract more of the same to the property, thereby increasing the property’s stability and by extension, the property’s long-term value. The creditworthiness of MOB tenants became apparent during the COVID-19 pandemic, when medical office rent collections remained strong. According to data firm Revista, LLC, medical office landlords reported collection rates in excess of 95 percent, even during the depths of the pandemic. Medical offices, unlike other property types, are not as prone to rent collection peaks and valleys given the stability of the tenant base.
Some Final Thoughts:
Competition for medical office real estate is steadily rising—and will continue to climb as more investors become educated about the sector’s resiliency, strong underlying fundamentals, and long-term prospects. As competition increases, investors should expect to see prices increase as well. However, high prices are expected to be supported by higher rents, which continue to climb in an otherwise constrained market where new construction remains limited.
If you are a real estate investor looking to diversify your portfolio, there’s no better time than now to consider medical office real estate. Get in touch with Anvers Capital Partners today to learn more.
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