The Small Space Marketplace

List Your Space

Find Space

Home About Us Executive Subscriber Membership RENTV Conferences Newsletter Contact Us Advertise
May 18, 2024
 Search RENTV
 The REview
News Home Page
Southern California
Northern California
Pacific Northwest
Prop. Management
Press Releases
 R. E. Marketplace
Service Providers
Property Spotlight
 RENTV  Conferences
Subscriber Login:
Forgot Password?

Printer-friendly Version   Email an Associate
Aging U.S. Population is Boosting Demand for Medical Office Space


The aging U.S. population, pressure for healthcare providers to cut costs and new technologies have boosted demand for medical office properties in recent years, according to a new report from CBRE. The U.S. Census Bureau estimates that the 65+ population will nearly double between 2015 and 2055 to more than 92 million and comprise nearly 23 percent of the country’s total population by that time.

In Southern California, this increasing demand and single-digit vacancy rates, coupled with low levels of new supply in recent years, have fueled record rent growth. Medical providers pay the most for office space in Los Angeles, Orange County and San Diego, each recording increases of 9% or more since 2010. Los Angeles is fourth on the list of most expensive U.S. medical office markets after New York, San Diego and the San Francisco/Bay Area as of the first quarter of this year.

“Southern California is a very expensive market for healthcare providers regarding their real estate occupancy costs,” said Senior Vice President Bryan Lewitt, Southern California practice leader for the Healthcare Services Group. “This region is extremely under-built when it comes to healthcare real estate. During this last economic recovery, half of the potential healthcare properties were converted to non-healthcare uses.”

The lack of available space is particularly challenging for larger providers, according to Lewitt.

“If a healthcare tenant requires a big block of contiguous space, they will have few or no choices,” he said. “This is often forcing providers to expand their geographic search areas outside their ideal submarkets. But we do believe that once this long real estate recovery concludes, there will be opportunity to expand the supply of medical space and possibly lower rental rates as well.”

In Los Angeles, the first-quarter medical office building vacancy rate was 7.1%, down 150 basis points from a year ago while average asking rents increased 10.5% year over year to $33.24. The nationwide vacancy rate was 8 percent.

Healthcare providers are facing increasing pressure to reduce costs in the face of uncertain reimbursement rates from Medicare, Medicaid and private insurance companies, and improve patient outcomes. Adopting new technologies is one method for improving healthcare outcomes, but the upfront capital required means that costs must either increase or be trimmed elsewhere. Several key ways in which healthcare providers are attempting to reduce costs are by relocating services closer to where patients live, utilizing video technology to meet with patients remotely and moving more patient volume away from hospitals – the highest-cost facilities – and into lower-cost outpatient facilities, including medical office buildings and urgent-care facilities.

“The evolution of medical technologies is boosting demand for newer product with the infrastructure capable of handling cutting-edge devices and systems,” said Jim Hayden, executive managing director, Healthcare, Global Workplace Solutions, CBRE. “Medical office space that helps providers minimize costs and maximize outcomes, including buildings that support collaboration and can accommodate new technologies that help them achieve these goals, will likely remain in favor.”
Capital Markets Trends

The current and expected increase in demand for medical office space also has caused investment in the sector to increase substantially over the past seven years. Total U.S. investment volume in medical office buildings of at least 10k sf rose from just under $4 bil in 2010 to $10.2 bil in 2016. Moreover, total investment in 2016 exceeded the prior annual peak of $7.3 bil in 2006, further reflecting increased optimism in medical office and not simply improvement from the recession.

California received the majority of medical office investments in the West, making up 56% of total investment for the region, with Greater Los Angeles, including Orange County and the Inland Empire, alone representing 37%. If California were its own region, it would have seen the fifth-largest amount of medical office investment since 2009 at $6.4 bil, ahead of both the Northeast region at $5.4 bil and the Mid-Atlantic area at $4.7 mil.

“As investor appetite for healthcare-related real estate has grown, medical office buildings have emerged as the most popular property type within the sector,” said Chris Bodnar, executive vice president, Healthcare, CBRE Capital Markets. “As yields for traditional real estate asset classes have compressed in recent years, new capital sources—including foreign capital—have entered the medical office sector in search of stability to hedge against any potential correction in the global markets.”

Medical office cap rates have consistently decreased from a high of 8.3 percent in mid-2010 to 6.8 percent as of Q1 2017. On a regional basis, average cap rates have been lowest in the West over the past seven years, below the U.S. average by about 60 bps. However, the spread between the highest and the lowest regional cap rates remained relatively tight during this period, as industrywide trends have a similar impact across the various markets.

“Some of the nation’s top healthcare players have their highest-grossing facilities located here in Southern California,” said Lewitt. Therefore, higher lease rates, construction costs and building prices are just one of the factors of doing business here. Demand from providers and the investment community alike will only continue to grow.”

Return to the Archive page



Home | About Us | Newsletter | Contact Us | Executive Subscriber Membership | Executive Subscriber Home | Advertise
Southern California | Northern California | Pacific Northwest | Southwest | Retail | Multifamily | Financing | Property Management
Archives | Press Releases | Service Providers | JobWorks | Property Listings

Copyright © 2024 by RENTV, All Rights Reserved
Website designed by Regency Web Services, Inc. and powered by Lightning Media