The healthiest investment in commercial real estate is where the sick people are: medical offices

  • The coronavirus pandemic has upended commercial real estate, especially in sectors such as retail and hospitality. 
  • A report by commercial brokerage Marcus and Millichap predicts that the medical office sector, long a resilient asset class, will be one of the quickest to bounce back from the pandemic.
  • The report points to the growing number of sick and aging Americans who will likely have to go to physical appointments. 
  • Visit Business Insider's homepage for more stories.

The coronavirus pandemic has turned offices across the world dark, giving a clear blow to the commercial real estate sector. The medical office space, despite the sad uptick in serious illness in 2020, has been a surprising struggler, too.

Per a report by commercial brokerage Marcus and Millichap, due to restrictions on things like elective surgeries and non-emergency office visits, healthcare providers in the medical space have seen a dip in revenue streams.

However, Marcus and Millichap sees this as a short-term issue and believe the medical industry will be one of the quickest to bounce back from the pandemic, due to inevitable consumer demand.  

"Medical services are returning as states move through reopening phases, and pent-up demand from postponed procedures and office visits provide a positive outlook," the report reads.

Modifications to the sector will stay

Virtual care has skyrocketed since the onset of the pandemic, and it's expected to continue booming in popularity afterward.

"Telehealth has proved to be an integral channel to ensure access to healthcare while also acting as an alternate revenue stream for care providers. After the easing of restrictions, 43.5% of primary care visits for Medicare beneficiaries were via tele- health services in April, up from nearly zero in February," the report reads.

However, virtual care won't replace the need for physical offices. In fact, it's expected to sustain the demand for them as more people tune in virtually for things like initial check-ins but attend physical office spaces for treatments.  

The medical office space is a healthy asset class and is expected to remain one

Marcus and Millichap reported that for the 12-month period ending in June 2020, medical office sales remained stable, for the most part, dipping only 2%. Per the report, medical offices accounted for 19% of the overall office volume in the second quarter of the year.

 Beyond the report, developers have the same bullish outlook.

On an episode of the National Real Estate Investor Common Area podcast this past summer, guest Bob Atkins dove into the state of the medical office space and his forecast for the future of the asset class.

Atkins is managing partner at Atkins Companies, a real estate development company with a primary focus on medical office properties. Currently, the company manages about 700,000 feet of medical office space across five US states.

As we move out of the crisis, Atkins said he expects activity to pick up.

"I think everybody is fairly optimistic that the medical office space and the medical office asset class will be one of the first ones to recover, coming out of the crisis," he said.

Backing Atkins' outlook, Marcus and Millichap laid out a few factors supporting the future growth of the sector, including baby boomers and capital.

Per the report, the 65-and-older group in the US will increase by 30% over the next decade. Members of this group typically attend more than five office appointments each year. This, in addition to the growth in medical tech, will allow care services to continue moving out of hospitals and into outpatient medical office spaces. 

"Prior to the pandemic, expanded medical coverage and new treatment options drove space demand in the sector with more patient services moving away from hospitals and to out- patient care facilities. The structural shift in demand has benefited owners of medical office properties with vacancy moderately above all-time lows, supporting strong investment activity," the report reads.

And it's not just the baby boomers who will be attending appointments. According to the CDC, one in six American adults in the US has a chronic illness, thus further amplifying the need for office visits.

In addition to sick and aging Americans, there is also an abundance of sidelined capital

Per Marcus and Millichap, banks have been conservative with money during the pandemic. This has left lenders with a lot of sideline capital. It has kept loan-to-value ratios typically in the 50 to 70 percent range (reliant on dependent factors like who the borrower is and the location of the property), and has made interest rates attractive.

"The stability and resilience of the medical office sector during this downturn should keep buyer-seller expectations better aligned than for more impacted asset classes. Assumptions surrounding operating expenses, rental rate increases and tenant turnover are proving more durable due to strong demand for medical services, bolstering net operating income," the report reads.

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