Vital Signs Fall 2021: Healthcare and Medical Office Report

HEALTHCARE REAL ESTATE REMAINING STEADY

Despite the many challenges that COVID-19 brought to bear on healthcare providers, including the temporary suspension of outpatient procedures, medical offices across geographies performed well as a real estate asset class. Occupancy held steady in most markets and demand for clinical medical office space recovered through the remainder of the year once outpatient procedures resumed and volumes recovered. Medical office rents also held steady or saw modest growth in most markets. Limited medical office supply coupled with steady demand helped to ensure strong rent performance. Class A medical office performed particularly well throughout the pandemic and has continued to see demand as healthcare prodedure volumes have returned. Most publicly traded healthcare REITS reported 2 to 3% effective rent growth in 2020. New medical office development has also remained brisk in the past year. 2020 saw an overall increase in construction starts versus 2019, and Q1 2021 saw an increase over 2020. 2020 completions also remained strong and tracked with prior years. Q1 2021 completions were down slightly from 2020. Given typical medical office development timelines of 2-3 years, recent completions were well underway when the pandemic hit. Construction costs have risen significantly since Q1 2020. We expect rising construction costs to begin to weigh on new construction starts. Speculative medical office construction remains challenging, anecdotally, with most new projects requiring at least 50% preleasing to move forward. Underwriting has also become more selective in respect to markets and submarkets. Markets with the most desirable patient demographics and payer mix are more advantaged compared to those with less desirable patient demand. MEDICAL OFFICE CONSTRUCTION T12M MOB CONSTRUCTION STARTS COST PER SQUARE FOOT MEDICAL OFFICE CONSTRUCTION MOB COMPLETIONS, STARTS AND IN-PROGRESS

15 20 25 30 35 40 45 50

500

450

400

350

Million Square Feet

Dollars per Square Foot

300

SF Started TTM SF Completed TTM SF in Progress

Source: Revista Med, Cushman & Wakefield Research

Source: Revista Med, Cushman & Wakefield Research

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