Demand for medical real estate hotter than ever

More certainty about the Affordable Care Act, a shift to outpatient facilities and investor interest have medical buildings setting records for sales volume.

As a result, physician groups with medical office portfolios are in the best position to turn profits.

Medical office and outpatient facilities sold for nearly $6 billion in 2012, higher than the 2006 peak of $5.5 billion. Sales of medical office buildings exceeded $2 billion in 2012, more than double the previous sales record set in 2007, according to real estate developer and manager Jones Lang LaSalle’s health care report, issued in May. The company said it wouldn’t be surprised if more records are set in 2013. The report tracked medical office buildings that are more than 25,000 square feet.

The sales increase is partly due to the big push for more outpatient care. Medical office buildings performed well compared with other real estate classes, especially during the economic downturn in 2009, said Mindy Berman, managing director of capital markets at Jones Lang LaSalle.

Doctors who own buildings may well be “in a great position to sell,” she said.

Who stands to make the most profit

The highest prices for medical office buildings are for hospital-campus properties and new hospital-aligned outpatient developments built to current standards, she said. Developers who establish relations with hospital systems and those who have the ability to build independently are in the best position to make the most money, according to the report.

Physician groups could turn sizable profits by working with developers of medical office buildings, said Rebecca Harrell, a medical office broker at Henry S. Realty Services in Texas. The key to success with these projects is to select great locations with high traffic volumes or those near a major health system where the buildings can be rented to multiple specialties for good tenant mixes, she said.

“On-campus medical office buildings will always be the most favored for space,” Harrell said. “But it has to be a hospital that is full-service — not small community hospitals.”

The medical office building real estate sector is growing rapidly because tenants are much more financially stable compared with most office environments, according to the Urban Land Institute’s Outlook for Health Care report. As a result, medical office buildings are less volatile than other commercial markets.

Harrell said uncertainty about how the ACA would play out a few years ago somewhat slowed down the market, but the medical office market is gaining momentum now that it’s clearer where the industry is heading.

New developments on the rise

The growth in sales volume comes even as new space is being added. For example, 33.7 million square feet of medical office building space was under construction across the country in the third quarter of 2012, according to a Jan. 11 report from Colliers International, a global real estate company.

A survey of 156 health care real estate developers released in December 2012 by Newmark Grubb Knight Frank, a New York brokerage, found that 65% said development would be higher in 2013 than in 2012.

Marcus & Millichap estimated that medical office vacancies have dipped to 11% in 2012, the lowest rate since 2008. The Urban Land Institute report indicated that 64 million square feet of additional medical office space would be required during the next decade.