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H2C INDUSTRY IN­SIGHTS • REAL ESTATE

3Q20 Medical Office Building Report

Health Systems Make Strategic Moves in Second Full COVID-19-Impacted Quarter

October 29, 2020

Health systems lead third-quarter activity as cap rates show modest compression during a quarter that saw lower transaction volume.

This is H2C’s second quarterly medical office building (“MOB”) report reflecting the full impact of the COVID-19 pandemic. While COVID-19 continues to weigh on transaction volumes, with volumes totaling only $1.6 billion, marking the lowest quarterly transaction volume since Q1 2014, the MOB sector continues to show remarkable resilience in pricing. Average cap rates saw a slight decline of five basis points in Q3 2020, with the average cap rate for MOBs falling to 6.55 percent.

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Health system-based activity made up over 25 percent of the transaction volume in the third quarter, with systems selling and acquiring MOBs. Publicly traded REITs continued to be net sellers, continuing a reversal that began in Q2, when REITs switched from transacting as net acquirers. This reversal is notable given that REITs had been net acquirers of MOBs for four years up until the impact of the COVID-19 pandemic. Select REITs continue to monetize non-core assets and have curtailed acquisitions due to depressed stock prices. While many healthcare REITs have seen improvement in stock prices since the depths of the market decline in March 2020, the majority still trade below their Q1 2020 peaks.

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Despite the limited transaction volume, MOB transaction pricing continues to hold steady, indicating a sustained level of market interest in the MOB space, particularly from private and institutional investors. As cited in previous H2C reports, investors view the MOB space as a “safe haven,” where assets serve necessary and growing uses in the provision of healthcare. The uncertainty caused by the COVID-19 pandemic seen in other real estate asset classes, such as retail and hospitality, is increasing investor interest in the stability of the MOB space, which benefits from significant long-term tailwinds, such as an aging population and increased healthcare spending.