Medical Office Vacancy Rate Plummets to 9-Year Low

As 2016 draws to a close, it appears medical office supply and demand are more in sync than they have been for several years.

In fact, the medical office vacancy rate is at its lowest point since early 2007, according to a new report from national brokerage firm Marcus & Millichap (NYSE: MMI).

The medical office vacancy rate hit 8.6% in the second quarter of 2016, and is down 80 basis points over the last 12 months, the national Medical Office Research Report for the third-quarter of 2016 says. Vacancy rates varied region by region, with the Pacific Northwest Region posting the lowest vacancy in the country at 4.9%, and the Las Vegas, Tucson and Phoenix metros posting some of the highest medical office vacancy rates at more than 16% in each market.

Builders are expected to bring a total of about 11 million square feet of medical office space online in 2016—over 3.5 million of which was delivered in the first six months of the year, the report adds.

Asking rents for medical office space, meanwhile, continued to increase modestly, hitting 0.2% over the past year to $22.61 per square foot in the second quarter of 2016.

The medical office sector, as a whole, is shifting to a more patient-centric care delivery model, the report notes. This trend has resulted in several off-campus projects, including large medical office buildings that house numerous outpatient and physician services, as well as standalone emergency departments.

That’s not to say on-campus medical office buildings are going anywhere. In fact, on-campus medical office space continues to increase as hospitals replace or expand existing buildings and add specialized facilities, such as critical care and cancer centers, to their campuses.

Medical office sales activity is on the rise, the report notes. Deal flow accelerated 17% during the trailing 12 months ending in June, and the average price has risen 17% since the end of 2014 to $230 per square foot. Increased interest has compressed cap rates and boosted buyer competition, the report says.

Institutional-grade properties, especially, have experienced a major uptick in velocity in recent quarters, and price appreciation during this time has been fueled by an increase in sales of these Class A buildings, the report says.

On-campus buildings that are sold draw sub-6% initial yields for single-tenant buildings, while multi-tenant properties command first-year returns in the mid-6% to low-7% range.

Off-campus properties that have strong tenancy, including long remaining lease terms and a health care system, are currently in high demand and sell for a premium. These buildings command cap rates in the mid-6% region.

Additional kinds of off-campus medical office buildings, such as those located in secondary or tertiary markets or those that require repositioning, can trade with first-year yields up to 200 basis points higher, the report notes.

Access the Marcus & Millichap report here.

Written by Mary Kate Nelson