Medical Outpatient Building Sector Overview
The medical office sector continues to perform well, setting record highs for asking rents and sales volume in 2022. Demand is outpacing supply, vacancy remains tight, and development is picking up, reflecting confidence in the sector. This is encouraging given the challenges of the healthcare industry, but there are signs of softening as well, with cap rates showing differing trends between single asset deals and portfolio transactions. Average pricing increased compared to 2021, but eased in the second half of 2022.
Medical Office Fundamentals: Key Takeaways
Vacancy: The medical office (MOB) vacancy rate fell by 80 basis points in 2022, to 7.4%, better than vacancy in the broader office sector of 15.7%, which increased 80 basis points in the same period.
Absorption: Demand for medical office space remains strong, outpacing new supply. Net absorption totaled 18.8 million square feet in 2022, up from 18.1 million square feet during 2021.
Rents: Average net asking rents for MOB space increased by 3.7% in 2022 to $23.57 per square foot — a new high for the sector.
Construction: The total of 11.6 million square feet of MOB space delivered in 2022 was down from 15.1 million square feet in 2021.
Sales: Total investment in MOBs reached $25.4 billion in 2022, up from $18.6 billion in 2021. Sales pricing rose to an average $390 per square foot, while average cap rates increased by 40 basis points on portfolio deals, to 5.8%. Cap rates held flat for single asset transactions at 6.4%. This data is skewed by the Healthcare Realty Trust and Healthcare Trust of America merger. Numerous properties related to these entities were transacted, increasing overall sales volume.
Vacancy Falls and Rents Rise
Four of the 10 leading U.S. MOB markets ended 2022 with vacancy rates lower than the overall average, while five of these achieved above-average rent growth. New York rent growth in 2022 was the strongest, at 8.6%, followed by Washington, D.C., at 7.6%, and Chicago at 7.3%. Boston enjoys the lowest MOB vacancy rate across the major markets, at 6.2%, followed by Miami at 6.6%. Conversely, Dallas and Houston have the highest vacancy levels in leading markets, 10.1% and 12.3%, respectively.
Los Angeles has by far the highest average net MOB asking rents in the top 10 markets, at $36.88 per square foot, while other rents in the top 10 metros fall below $30 per square foot. Boston and Washington, D.C., are the next highest, at $27.48 per square foot and $27.41 per square foot, respectively.
MOB Construction Is Rising and Focused on Off-Campus Locations
While the amount of MOB space being completed was falling in 2022, the volume underway was rising. Completions of 11.6 million square feet during 2022 were down from 15.1 million square feet in 2021. But MOB space under construction was 39.9 million square feet, 5.7% higher in 2022, reflecting sustained developer confidence in the sector. Of the 713 healthcare real estate projects underway, 256 are hospital developments and 457 are MOB buildings. MOB construction remains concentrated off-campus to provide readily accessible locations and outpatient clinics to accommodate the shift away from in-patient hospital care. Off-campus properties—usually smaller than new on-campus facilities—account for 73% of projects underway. Fourteen metros have more than one million square feet of MOB construction underway, led by Houston with 2.7 million square feet, and New York and Washington, D.C., at two million and 1.8 million square feet, respectively. Across medium-to-larger-sized markets, Sacramento leads in construction, with 1.3 million square feet underway, or 15.3% of market inventory; Cleveland and Orlando follow, at 13.2% and 11.7%, respectively. The overall average is 3.9% of market inventory.
Cap Rates Rise as Pricing Falls
MOB investment in 2022 of $25.4 billion was the highest total on record, up from $18.6 billion in 2021, thanks in part to the merger of Healthcare Realty Trust and Healthcare Trust of America. Despite the healthcare industry’s challenges, investment in the sector continues to rise, and medical real estate is no longer perceived as a niche asset class. Average MOB cap rates showed varying trends between single asset sales and portfolio transactions. Throughout 2022, average MOB pricing increased to $390 per square foot in Q4 2022. Eleven metros exceeded $500 million in MOB property sales in 2022, led by New York at $1.4 billion, Los Angeles at $1.3 billion, Houston at $1.25 billion, and Dallas at $1.2 billion.
Click here to download the full Colliers 2023 Healthcare report as a PDF.
