Medical Office Real Estate: A Net Lease on Life

While many real estate investments are loosing value, the medical office sector has shown remarkable resilience. According to a report from Marcus & Millichap Real Estate Investment Services, the segment is holding up much better than other property types and this trend projects to continue.

Currently the nation spends $2 trillion on health care annually, by 2013 that number is projected to grow to $3 trillion. In-fact, medical expenses have increased by an average of 7.7% over the past 10 years and now make up 17% of GDP. This exponential growth has been fueled by the large amount of baby-boomers who are steadily increasing in age and by 2013 the number of people over 55 will have increased by 20%. As more people advance in age, their medical expenses will rise correspondingly, fueling demand for the medical office segment.

Another driver of demand has been the shift from “an impatient to outpatient focus”. This has been caused by the steep rise in costs associated with hospital construction. A single hospital bed is now estimated to cost $1 million, driving many new hospitals to house around only 100 beds compared to older hospitals featuring close to 800. This decrease in supply, coupled with an increase in demand from an aging populace, has created a large need for medical office space.

These trends are reflected in the industry’s employment numbers. While the rate of job growth has decreased, job growth itself is still positive. 50,000 jobs have been added this year and another 200,000 are projected to be added by years end. By 2013, 2.4 millions jobs are projected to be added to the sector.

Despite these positive indicators, vacancy is projected to rise. This is due to the economic climate which is forcing many to abstain from health care expenditures they previously would have made. All told, vacancy is projected to increase by 100 bps this year, reaching 12.4% and rents will decrease by roughly 2.7%.

This increase in vacancy should be seen as a possible opportunity for those considering investment. Unlike other sectors, medical office real estate is virtually guaranteed to see a future rise in value as our population ages and health costs increase. Furthermore, if you couple a medical office investment with a net lease structure, you can create a passive investment that will see real growth in the future. This is perfect for someone who wishes to take a less active role in property management but still see his property value escalate. The combination of higher demand, less space and higher employment make medical office real estate an attractive net lease investment for the future.