Despite Record Occupancy, Areas of Uncertainty Remain for Health Care
Overall, 2016 was a year of expansion for health care real estate in the United States. The national vacancy rate for medical office buildings (MOB) hit an all-time low. Net absorption of MOB space was the highest since 2008 while average rents grew. Investment activity—while down slightly from 2015—remained strong and compressed capitalization rates slightly.
As 2017 gets underway, health care providers and health system owners are facing a variety of considerations that could impact their businesses and real estate strategies. Despite the uncertainty surrounding the Affordable Care Act and rising costs in every facet of the industry, health care real estate fundamentals remain solid and the industry will likely remain buoyed by consumer demand.
- Vacancy: Strong demand for MOBs pushed the national vacancy rate to an all-time low of 7.4% at year-end 2016.
- Absorption: MOB net absorption increased by 25% in 2016 from 18.1 million square feet to 22.7 million square feet—the highest annual total since 2008.
- Rents: Full service gross (FSG) MOB rents rose by 8% in 2016 to a national average of $24 per square foot.
- Construction: Following 14.6 million square feet of deliveries in 2015, the 2016 delivery total is set to exceed 22 million square feet—just below the 2008 peak of 24.9 million square feet. Nonetheless, this new supply is still modest in inventory terms, representing only 1.7% of the total MOB universe.
- Sales: Total investment in MOBs fell from $11.6 billion in 2015 to a still-respectable $9.3 billion in 2016. At 6.7%, average MOB cap rates are in line with the office sector average cap rate of 6.5%.