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First Quarter Marks Lowest MOB Quarterly Transaction Volume In Over A Decade

First quarter data shows a steep decline transaction volume as supply lags and investors hold

May 2023


Medical office building (“MOB”) sales volume in the first quarter of 2023 was $1.5 billion, nearly a 50 percent decline from the fourth quarter of 2022 quarterly sales volume of $3.0 billion. The first quarter, which is typically one of the less-active periods each year for transactions, saw the lowest sales volume since the first quarter of 2014 and the least number of buildings to transact since 2019 with just 236 properties changing ownership. The average number of MOBs to trade in the first quarter over the last three years was 315, which purports a nearly-25 percent drop in transactions for Q1-23.

Source: Based on an H2C analysis of industry data from RCAnalytics.

While remaining a very attractive investment when compared to other asset classes, MOB valuations did see cap rates climb to 6.4 percent, an increase of 30 basis points when compared to 2022 averages. Higher interest rates which have increased the cost to borrow, are driving the upward pressure of cap rates and decline in investor activity. The Federal Reserve raised interest rates for the tenth consecutive time in early May, with the thought that rates could continue to rise before year end. However, the lack of supply of quality medical office buildings should help the MOB sector continue to outpace competing asset classes. 

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Source: Based on an H2C analysis of industry data from RCAnalytics.

The number of properties exchanged in the first quarter totaled 236, which was a slight decrease from the 2022 fourth quarter’s 291 properties, and 40 percent lower than the average number of properties sold per quarter in 2022. The slowdown in transaction volume is likely a result of investors who have acquired assets from 2019-2022 viewing the value of their assets having not risen since acquisition given where buyers can borrow at, which has moved average MOB cap rates upward as a result. As the Fed continues to try and tame inflation, the market has seen five increases since September of 2022, however, there is optimism as the 25 basis point hikes in February, March, and May were the lowest since March of 2022. 

With the news of recent bank failures, rising interest rates and construction costs, there appears to be an increase in the number of multi-tenant MOB deals in comparison to single-tenant. This could be due to investors viewing cost basis of value-add opportunities favorably in comparison to new development and a belief that the leasing environment is strong following a slowdown in leasing activity from 2020-2022 pre and post-COVID. 

This has created an opportunity for groups with "dry powder" to acquire properties at a lower basis, make the necessary renovations and consequently increase rents. H2C predicts that the appeal of value-add MOBs will grow substantially as investors look to exit the sidelines and take advantage of pricing and ability to push attractive returns with opportunities that have not been seen over the trailing years.

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Source: Based on an H2C analysis of industry data from RCAnalytics.

Investment Sales Trends

The largest transaction in the first quarter was completed by Big Sky Medical Real Estate (“Big Sky”) with the acquisition of a 10-property MOB portfolio for ~$190 million. The portfolio, which is spread across four states and comprised of over 857,000-square-feet, was inclusive of outpatient medical office buildings, ambulatory surgery centers (“ASCs”) and diagnostic imaging centers. The portfolio is approximately 87.0 percent occupied with six of the ten assets located within Texas. Big Sky has been one of the most active investors of MOB assets over the last year, with a specific focus on the state of Texas. The company has holdings in almost every major metro within the state and currently has a portfolio comprised of 120 MOBs, spanning over 6.3 million square feet. 

The New York State Common Retirement Fund (NYSCRF) invested $72.7 million to acquire a portfolio of five medical office buildings in the US. The portfolio, totaling 180,000 square feet, is primarily leased to credit tenants and located in the metropolitan statistical areas of Reading and Lancaster, Pennsylvania, Dallas, Atlanta, and New Haven, Connecticut. The properties are strategically situated in densely concentrated medical corridors near healthcare infrastructure and established healthcare clusters, all within five miles of major hospitals and smaller medical centers. As a much more resilient asset class than traditional office, medical office is believed to be an attractive investment option, particularly during times of economic uncertainty.

Regional Review

The Southeast U.S. had the largest dollar volume of sales in the third quarter with nearly $550.0 million in transactions. Additionally, two other regions across the U.S. (Midwest and Southwest) saw transaction volumes exceed $210.0 million of activity. 236 properties transacted in the U.S. in the first quarter according to RCA data.  

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Source: Based on an H2C analysis of industry data from RCAnalytics.

Northeast Region

In January, Evergreen Medical Properties acquired a 70,000-square-foot medical office building in Waterford, Connecticut, for an undisclosed amount. Completed in early 2022 and strategically located just off I-95 on Route 85, the facility's anchor tenant is Hartford Healthcare (-/A/A+), a seven-hospital health system that serves over 185 cities. The state-of-the-art building, developed by READCO, houses a variety of services, such as urology, rheumatology, and primary care. 

Additionally, in March, Atkins Companies announced the acquisition of the 70,000-square-foot Washington Medical Arts Building in Washington Township, NJ for $14.0 million. Situated in Gloucester County, the two-story Class-A facility is leased to various healthcare and wellness tenants, including Weisman Children's, Rowan Medicine, Select Surgical Center, and Jefferson Health. Located near Jefferson Washington Township Hospital and accessible via Routes 42, 55, and 322, the property caters to the growing demand for outpatient medical hubs, as regional providers expand ambulatory care services. 

Mid-Atlantic Region

In January, Welltower acquired a 162,000-square-foot medical office building in Washington D.C. for $78.25 million, or $483 per square foot, from TF Cornerstone at a 6.50% cap rate. The eight-story property was 80% leased at the time of sale, with anchor tenants such as The GW Medical Faculty Associates (Affiliate of George Washington University – A1/A+/-) and Children's Pediatricians and Associates (A1/-/A+). The facility is located in a prime location with close proximity to renowned medical institutions like George Washington University and MedStar Washington Hospital Center.

Additionally, in March, a joint venture between Kayne Anderson Real Estate and Remedy Medical Properties completed a sale-leaseback of Bon Secours Chester Emergency Center in Chester, VA for $20.25 million or $810 per square foot. The one-story, 25,000-square-foot freestanding emergency room, known for its high-quality healthcare services, will be fully occupied by Bon Secours Health System (A1/A+/AA-), ensuring exceptional emergency care to the community.

West Region

In January, Anchor Health Properties expanded its presence in the city of Menlo Park in the San Francisco MSA, by acquiring a 45,000-square-foot medical office building. The fully occupied Class-A outpatient building houses a synergistic mix of tenants, including anchor occupants Stanford Health Care (Aa3/AA-/-) and Lucile Packard Children's Hospital (A1/A+/AA-), as well as various regional practices providing primary and specialty care services. The facility's strategic location near leading inpatient centers like Stanford Hospital and Lucile Packard Children's Hospital facilitates numerous patient referrals within its ecosystem and neighboring healthcare establishments. This addition brings Anchor's Northern California portfolio to nearly one million square feet of medical office space.

Additionally, in March, a joint venture partnership between Kayne Anderson Real Estate and Remedy Medical Properties successfully completed the sale/partial-leaseback of Rockwood Main Clinic in Spokane, WA, and Northshore Clinic in Tacoma, WA, for $55.7 million or $420 per square foot. The properties, sold by MultiCare Health System (-/A+/A+), are fully occupied, with Rockwood spanning 116,000 square feet and Northshore covering 16,700 square feet. 

Southwest Region

In January, Welltower acquired a 35,000-square-foot medical office building in Goodyear, Arizona, for $13.8 million or $394 per square foot from Hammes Partners. The property was part of a five building portfolio, totaling $40.1 million across 162,000 square feet. Constructed in 1997 and renovated in 2011, the two-story Class-B facility is fully leased, housing Mountain Park Health Center as the anchor tenant along with Phoenix Heart and Phoenix Spine Surgery Center. The property is ideally situated just off I-10 and within 1.5-miles of the Abrazo West Campus. The MOB offers services that include pediatrics, family medicine, women’s health, and ASC space.

Additionally, in March, Montecito Medical Real Estate purchased the Banner Health Center - Peoria for $29.0 million in a sale-leaseback transaction. This fully occupied, 68,000-square-foot facility in Peoria, Arizona, comprises a three-story medical office structure situated on 5.68 acres. The property is exclusively leased to Banner Health (-/AA-/AA-), housing a multi-specialty ambulatory surgery center with three operating rooms, state-of-the-art imaging, and a range of primary and specialty care services. Positioned at 13640 N Plaza Del Rio Boulevard, the single-tenant facility serves as a crucial outpatient hub for the northwest Phoenix metropolitan region, situated less than two miles from the 410-bed Banner Boswell Medical Center.

Midwest Region

In January, Montecito Medical acquired two Class-A orthopedic medical office buildings in the Cincinnati area for $65 million or $500 per square foot, encompassing a combined total of 130,000 square feet. The facilities were acquired through a sale/leaseback with Beacon Orthopedics, one of the fastest-growing orthopedic practices in the region, offering comprehensive services such as clinical orthopedics, orthopedic surgery, physical therapy, and imaging. Catering to the region's unfulfilled demand for outpatient surgical services, both facilities feature advanced ambulatory surgery centers.

Additionally, in March, Hammes Partners acquired a six-building medical office portfolio in Chicago's northern suburbs, totaling over 120,000 square feet. The properties traded for $20.95 million or $174 per square foot. The portfolio, consisting of Class B and C one- and two-story buildings, was 94% occupied at the time of the transaction, with long-term leases in place. Notable tenants include Advocate Aurora (Aa3/AA/AA), North Shore University Health (-/AA-/-), and Amita Health. The facilities are spread across Arlington Heights, Buffalo Grove, and Vernon Hills, near prominent medical institutions such as Advocate Good Shepherd Hospital, Advocate Lutheran General Hospital, and Northwest Community Healthcare/Hospital.

Southeast Region

In January, AW Property Co. acquired a nine-building, 350,000-square-foot medical office portfolio in the Greater Atlanta Area from Healthcare Realty Trust (NYSE: HR). Strategically located on-campus or adjacent to Advent Health and Piedmont Health hospitals, the 90% leased portfolio includes prominent tenants such as Harbin Clinic, First Georgia Physicians Group, Piedmont Health (A1/AA-/-), and Fresenius Medical Care (Baa3/BBB-/BBB-). The acquisition was made through AW's Medical Office Fund IV, a $300 million fund targeting medical office buildings in the Southeast United States, which already owns 650,000 square feet in FL, NC, TN, and VA.

Also, Healthcare Realty expanded its portfolio in March with the acquisition of Tampa Medical Tower in Tampa, Florida. This prime location features over 115,000 square feet of top-tier medical office space across eight floors, with a 98% occupancy rate, predominantly leased to Baycare Medical Group (Aa2/-/AA) and Tampa Bay Surgery Center. Adjacent to St. Joseph's Hospital, a distinguished 465-bed institution within the BayCare Health System, the Tampa Medical Tower enhances Healthcare Realty's presence in the Tampa-St. Petersburg-Clearwater area, now totaling 20 medical office properties and surpassing 1,000,000 square feet. 

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