Tessa Quinn
Investing in medical office buildings (MOBs) is an appealing prospect for hospitals and investors alike. Medical office buildings are designed to support medical activities and are typically located near hospitals, nursing homes, or other medical centers. They are subdivided to accommodate a range of healthcare uses, including exam rooms and waiting areas, and specialized systems such as HVAC to ensure proper air quality. The healthcare market is experiencing significant growth, with a projected annual growth rate of 10.4% from 2023 to 2027, making medical office buildings increasingly lucrative. These buildings offer stable tenant bases, long-term lease agreements, and consistent cash flow, making them attractive investments, especially in a diversified portfolio.
| Characteristics | Values |
|---|---|
| Investment type | Recession-proof, stable, long-term growth |
| Demand | Growing demand for medical office space |
| Location | On-campus, off-campus, downtown, suburban, rural |
| Building type | Class A, Class B, standalone, high-rise |
| Ownership | Individual investors, physician groups, hospitals, real estate investment trusts, institutional investors |
| Tenant type | Doctors, dentists, clinicians, hospitals |
| Lease agreements | Long-term |
| Patient population | Areas with lots of retirees |
| Amenities | Radiology, lab work, pharmacy access |
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What You'll Learn
Hospitals vs. outpatient settings: the shift to outpatient care
Hospitals and outpatient settings have distinct advantages and considerations for investors in the healthcare real estate sector. On-campus medical office buildings (MOBs) are typically situated near large hospitals and may have formal affiliations, such as referral networks. This proximity to hospitals and their associated networks can drive revenue and success for on-campus MOBs. However, off-campus MOBs are often found in suburban or rural areas, further away from hospitals, and are essential for various healthcare providers, including dentists, doctors, and clinicians.
The shift from inpatient hospital care to outpatient care is a significant trend favouring outpatient buildings. Over the last decade, outpatient admissions have increased by 10%, while hospital admissions have declined by 15%. This shift is driven by patients seeking more convenient and affordable care, with high-deductible plans becoming more common. Outpatient buildings provide extensive outpatient services, making them valuable assets for many companies.
MOBs offer several benefits that contribute to their appeal in the healthcare sector. They are designed with specialised features, such as HVAC systems, to ensure proper air quality and patient privacy. MOBs also provide convenient access to a wide range of healthcare services, catering to diverse patient needs. Additionally, MOBs often offer long-term lease agreements, providing investors with predictable cash flow and reduced vacancy rates.
The healthcare market's growth further enhances the attractiveness of MOB investments. With projected revenue of $57.86 billion in 2023 and an expected annual growth rate of 10.4% from 2023 to 2027, the market is anticipated to reach a volume of $85.95 billion by 2027. This growth translates into a steady demand for healthcare services, benefiting MOB investors.
When considering MOB investments, location is of paramount importance. Population density, patient demographics, and proximity to residential areas or transport hubs are critical factors influencing an investment's success. Additionally, investors should scrutinise the business plan, considering aspects such as purchase price, interest rate guarantees, and the experience and track record of the real estate company involved.
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Location, location, location: on-campus vs. off-campus
When it comes to investing in medical office buildings, location is a critical factor. Medical office buildings (MOBs) can be classified as either on-campus or off-campus facilities. On-campus MOBs are typically located close to large hospitals, often within walking distance, and may have formal affiliations with the hospital, such as referral networks. They rely on the hospital's referral network for their success and revenue. On-campus buildings are more costly due to factors such as architectural style compliance, increased operating expenses, and integration with the main hospital.
Off-campus MOBs, on the other hand, are usually found in suburban, rural, or residential areas, further away from hospitals. They are often situated in medical parks or neighbourhoods, allowing hospitals to expand their reach and attract patients who seek convenient care closer to home. Off-campus facilities help curb costs by focusing on an outpatient model and provide opportunities for one-stop healthcare, increased services, and fostering the hospital's outpatient market share.
On-campus MOBs are ideal for medical tenants seeking smaller medical centres that align with standalone buildings, as they offer benefits such as better ingress and egress and more independence for practices. They are also well-suited for physicians who want to own their real estate and operate their practice from the same facility.
Off-campus MOBs, however, may be preferred by physician groups looking to reduce congestion in the hospital area and provide more space for modern equipment. They also allow for more flexibility in design and construction, as they are not bound by the architectural style and aesthetics of the hospital campus.
Both on-campus and off-campus MOBs play a crucial role in the healthcare sector, offering convenience and accessibility to patients and healthcare providers alike.
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Healthcare's share of GDP: a stable investment
Healthcare's share of GDP has been steadily increasing over the years, with the US spending nearly 16% of its GDP on healthcare services in 2023. This is significantly higher than other developed countries like Germany, France, and Japan. While the US has higher healthcare spending, this does not necessarily indicate a better functioning health system. However, it does present a stable investment opportunity in healthcare-centric real estate.
Medical office buildings (MOBs) are specialised real estate assets dedicated to the medical field. They are designed with specific features like exam rooms, waiting areas, and tailored building systems such as HVAC systems for air quality and contaminant control. MOBs are commonly located near hospitals, nursing homes, or other medical centres, with on-campus MOBs situated close to or adjacent to hospitals, leveraging their referral networks. Off-campus MOBs are found in suburban or rural areas, catering to various healthcare providers, including dentists, doctors, and clinicians.
MOBs benefit from the shift towards outpatient care, reducing healthcare costs. While telemedicine may impact the industry, experts believe that medical office buildings will remain in demand well into the future. The healthcare sector's resilience to recession makes MOBs attractive investments. Additionally, MOBs have outperformed overall real estate in the last decade, with higher total returns and lower volatility in quarterly returns.
As healthcare spending continues to grow, investing in healthcare real estate, particularly MOBs, offers a stable opportunity. With the increasing demand for healthcare services, investors can expect a multi-year period of fundamental outperformance in this sector. The unique demand drivers and potential to outperform core real estate sectors make healthcare-centric real estate a compelling consideration for investors looking to diversify their portfolios.
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The ageing population: demand for healthcare services
The ageing population will significantly impact the demand for healthcare services. In 2020, there were 55.7 million Americans aged 65 and above, and this number is projected to reach 95 million by 2060. The 85+ age group is growing even faster and is projected to triple from 6.7 million in 2020 to 14.4 million in 2040. This demographic shift will result in an increased need for healthcare services, as older adults are more likely to have chronic conditions and disabilities. According to the National Council on Aging (NCOA), 95% of older adults have at least one chronic condition, and 80% have at least two. This will require a shift in healthcare focus from acute to chronic care.
The ageing population will also impact the healthcare workforce. There is already an estimated shortage of 17,800 to 48,000 primary care physicians in the US by 2034, according to the Association of American Medical Colleges. Hospital bed shortages and insufficient nursing home capacity are also concerns. Policy changes and new models of care, such as integrated care models and innovative technologies like telehealth and remote patient monitoring, will be necessary to address these challenges.
The ageing population will also affect the types of services demanded. As the proportion of minority populations with higher prevalences of certain chronic diseases increases, the diversity among the older population will influence the healthcare services required. Additionally, a growing percentage of older adults prefer to receive long-term care services in home and community-based settings, increasing the demand for care in multiple sites.
The impact of the ageing population on healthcare services extends beyond the medical aspect. Family caregivers play a critical role in supporting older adults, and there are approximately 41.8 million caregivers in the United States caring for adults aged 50 and older. However, caregiving can take a toll on the caregivers' emotional, physical, and financial well-being, leading to increased stress, depression, and reduced workforce participation. Resources such as support groups, respite care, and financial assistance programs are available to support caregivers.
While the ageing population presents challenges, it also creates opportunities for growth and development in the healthcare sector. The Bureau of Labor Statistics projects that healthcare occupations will grow by 13% from 2021 to 2031, adding two million new jobs. Innovations in medical technology and services catered to older adults, such as senior-friendly housing, specialized transportation services, and assistive devices, are also emerging to meet the changing needs of the ageing population.
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Class A vs. Class B MOBs: what's the difference?
Medical office buildings (MOBs) are specialised real estate assets dedicated to the medical field. They are designed with features like specialised heating, ventilation, and air conditioning (HVAC) systems to ensure proper air quality and patient privacy. MOBs are commonly located near hospitals, nursing homes, or other medical centres and can be classified as either on-campus or off-campus facilities.
On-campus MOBs are typically situated close to large hospitals and may have affiliations with them, such as referral networks. Off-campus MOBs, on the other hand, are often found in suburban or rural areas further away from hospitals. These medical office spaces are essential for various healthcare providers, including dentists, doctors, and clinicians.
When considering healthcare investments, it is important to understand the different types of MOBs available. Here is a comparison of Class A and Class B MOBs:
Class A MOBs
Class A MOBs are similar to other Class A real estate properties and tend to be newly constructed or recently built with high-quality materials. They are often located next to major medical clinics or hospitals and may be developed for the hospital itself or leased from healthcare real estate investment trusts (REITs) or parent corporations. Class A MOBs offer doctors the advantage of lower overhead costs and access to more amenities than stand-alone medical offices.
Class B MOBs
Class B MOBs are well-managed buildings ranging from low- to mid-rise structures. They are often located relatively close to medical centres or hospitals, sometimes on the same campus. Class B MOBs are owned by individual investors, physician groups, or hospitals themselves. These spaces are ideal for medical tenants seeking smaller medical centres that align more with stand-alone buildings, offering practitioners greater benefits, including better ingress and egress and more independence for their practices. They generally provide extensive outpatient services, making them valuable assets.
In summary, the main differences between Class A and Class B MOBs lie in their age and location. Class A MOBs tend to be newer and located right next to major medical facilities, while Class B MOBs are well-managed, slightly older buildings that may be located on the same campus as a hospital or nearby. Both types of MOBs offer unique advantages to investors and healthcare practitioners, contributing to the overall demand for medical office space.
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Frequently asked questions
Medical office buildings (MOBs) are a great way to diversify portfolios and mitigate risk. They are recession-proof to a large extent, as they are less impacted by remote working and the demand for healthcare services is unlikely to decrease significantly. MOBs also offer stable tenancy, long-term lease agreements, and predictable cash flow.
There are two main types of MOBs: on-campus and off-campus. On-campus MOBs are located near large hospitals and have affiliations with them, such as referral networks. Off-campus MOBs are found in suburban or rural areas, further away from hospitals.
Location is critical to the success of a MOB. Population density, patient demographics, and proximity to hospitals, residential areas, or transport hubs are key considerations. Other factors include the purchase price, interest rate guarantees, and the experience of the real estate company.
The healthcare market is experiencing significant growth, with projected revenue of $57.86 billion in 2023 and an expected annual growth rate of 10.4% from 2023 to 2027, reaching a projected volume of $85.95 billion. This growth makes MOBs even more attractive for investors.
