Avison Young’s Mike Wilson: Shifts in healthcare dynamics continue to fuel medical office investment

February 12, 2016  |  Staff Writer  |  Print Article  |  Email this Article

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Mike Wilson

Mike Wilson

Column By Mike Wilson, Principal, Avison Young

 

The medical office segment has been a hot commodity for several years, fueled by an abundance of capital, shifting patient care dynamics, and other factors. In 2015, there was a record $11.1 billion in investment seen nationally in this sector (Source Real Capital Analytics). While some of the most active buyers in the market may change in 2016, many signs point to this year being a continuation of last, as the recession resistant demand for this product type continues to push investment volume upward.

Among the key drivers of medical office building (MOB) sales are the very demographics that are commonly discussed in the news. The Baby Boomers age group is expanding — from less than 15% of the US population in 2015 to well above 20% of the population by 2020 and into the coming decades. The shift to the Affordable Care Act also has added 30 to 40 million people to the rolls of insured patients entering the market. These factors are significant in increasing demand for providers, and space.

Executives with many hospital systems began making strategic moves towards readying themselves for these important changes years ago.  A more efficient model of off-campus care has been developed which has greatly impacted how systems and physician groups use their space. This is having dramatic effects on the commercial real estate market.

The old phrase “go big or go home” has resonated in recent years as the consolidation of the healthcare market has driven the need for scale.  Small physicians and independent doctors have found that the road ahead with changing reimbursement structures. Further, skyrocketing insurance and equipment costs have made it extremely difficult to be a small player.

Smaller community and regional hospitals have also felt the pressure to join large systems.  Here in Chicago, consolidation has been very visible as major players Northwestern Medicine and Advocate Healthcare have gobbled up smaller hospitals and physician groups. A little less recent, but still significant, were mergers of smaller local systems like Resurrection and Provena Health to form Presence Health System as well as Edward Hospital merging with Elmhurst Hospital to become Edward-Elmhurst Health.

Consolidation on the provider side has also affected the real estate equation.  Ten years ago the capital markets saw pricing for off-campus medical office buildings starting to take off but the post-recession core-MOB looks to be a different animal.  Pre-recession, a Class A MOB may have been 40,000 square feet and home to 25 different direct independent physicians and small practice physician group tenants; now that same Class A MOB could have the same physicians but it is a single tenant building with one strong hospital credit on the lease and multiple specialties and sub-specialties offered.

Investors in healthcare real estate are looking closely at how a building is aligned with the dominant hospital systems and physician groups in the market. With hospitals moving more outpatient care off campus, the facilities have changed both locationally and in terms of size as the hub-and-spoke model pushes care closer to the population. The MOB no longer needs to be on the campus of the hospital to demand top pricing. Smaller retail type locations with visibility and ease of access allow systems to better compete for patients.

As hospitals and large physician groups continue to consolidate, the demand and valuations for MOBs should remain strong.  There is an inherent governor on the building of MOBs, the lack of overbuilding of medical offices — or at least rampant development of unneeded space — is tempered by the fact that speculative development of MOBs is a rarity, as most new development is user driven.

This restraint in development combined with the fact that nearly 80 percent of the approximate $315 billion worth of existing medical office buildings across the US is still owned by the health systems, limits the amount of product available to third party capital.  With a balanced development pipeline in mind, it is projected that the market for space, the rent growth and investor demand for MOBs should remain strong in 2016.

Mike Wilson is a principal in the Chicago office of Avison Young.  He is a leader in the national healthcare capital markets practice at Avison Young.  Over his career, Mike has advised institutions, private equity, domestic and off-shore pension funds, developers, healthcare systems, physician groups and other providers on capital markets transactions totaling well over $1 billion. 

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