In 2010, Medical Office Buildings (MOB) sales volume increased dramatically to 80 percent over 2009. According to Real Capital Analytics, MOB acquisitions totaled more than $3.1 billion by the last quarter of 2010. In our Southwestern region of the United States, we experienced $75.7 million in transactions in the third quarter of 2010, along with an average sales price per square foot of $223.
What’s up with this? This can’t be; everyone (me not included) says that we are still in a major recession/depression and that things are sure to get worse. As a matter of fact, those same people are as sure with those statements as they were with their sure statements in 2006 that the real estate bubble would never end and that the market will continue to go higher for years to come. (I had to give this little zing; I couldn’t resist.)
So, why this tremendous increase in sales volume and investor interest in MOBs?
One thing is for sure – and whether or not you supported the Obama administration in their healthcare reform – the passage of the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Tax Credits Reconciliation Act of 2010 opened the healthcare system to more than 30 million newly insured persons. Let’s put this into perspective: using the industry rule of thumb demand of 1.9 square feet of medical office space per person, then the newly insured will create a national demand for 57 million square feet of office space. As this demand comes online, secondary markets such as Flagstaff and Northern Arizona, which already have limited medical office space, will spark an increased tightness in the market.
So who is doing the buying of these MOBs and who will continue to drive our local commercial real estate market?
In secondary markets, although there is institutional demand, hospitals and doctors do the driving. Doctors tend to own their own facility as a long-term investment for retirement. They build equity through their career years and when they are ready to retire, they sell their practice, along with their facility. Additionally, doctors seem to be the some of the only people these days that lenders want to loan to.
However, doctors for the most part have tended to remain on the sidelines during the crazy last two years, believing that MOB values must be down just like the rest of the real estate market, when in fact the opposite is true.
All this being said, it’s obvious that we should continue to see pent-up demand that should drive up values and rental rates in our Medical Office Buildings. And, since there’s limited supply of buildings near the hospital, investors must look at nearby properties that can be modified for medical use.
You’ve got to be in it to win it! FBN
Mark T. Belsanti, CCIM is owner/agent of da Vinci Realty, LLC. He can be reached at 928-779-3800 Flagstaff, 928-254-1770 Sedona, or firstname.lastname@example.org.
You can view da Vinci Realty’s website at www.davincirealty.com to view his listings and read past articles.