Investment Trends in the Medical Office Space Including Single Tenant Retail Medical
Demand for Medical Office Space Normalizes; Investors Flock to Sector in Defensive Strategy
Southwest and southeast headline strong investment landscape.
Investment demand has endured better for medical over traditional offices. Sales velocity only dipped 10 percent in 2020 compared to 2019, before improving by more than 40 percent in 2021 for a record trading year. The most medical offices changed hands in Phoenix, Los Angeles, Atlanta and Southeast Florida, aided by favorable demographics. Excluding Los Angeles, entry costs in those metros were also below the national average.
Investors targeting stabilized assets with quality tenants.
Amid the ongoing health crisis, medical office investors are favoring properties occupied by tenants with strong ties to the location. This includes specialized floorplans and ample equipment common to offices for MRIs, dental work, dialysis and oncology services. This correlates with demand for longer lease terms of 10 years or more. Regional or national health systems and large physician groups also appeal to investors due to high credit grades.
Comparatively stable yields draw buyer demand for well-tenanted assets.
The mean cap rate has hovered in the high-6 percent to low-7 percent zone since 2016, with yields on institutional grade assets falling into the mid-5 percent band. Investors concerned about the risk profile of other property types are shifting to medical offices for a more stable outlook and higher comparative initial returns.