Medical office is the darling of commercial real estate today. As a result, we anticipate the development of medical office and outpatient surgery centers to swell in the next 3 – 5 years.
There are a number of reasons why medical office is doing very well and why it will continue to in the foreseeable future. First and foremost 7,000 baby boomers will celebrate their 65th birthday each day in 2011 and 3 to 4 million will each year through 2030. This along with the ever increasing number of people covered by health insurance means more doctor visits and ultimately more outpatient procedures. Secondly, medical office leases tend to be long-term (7 + years) with consistent rent bumps and are almost universally triple net leases. This all adds up to an unprecedented level of interest from investors and an overwhelming approval by lenders to fund these deals.
Nationwide cap rates declined an average of 60 basis points to 7.9% through the second quarter of 2011 from the same period in 2010 indicating that demand is beginning to overtake supply. This will mark a shift in increased development of medical office as the fundamentals are in place to absorb the additional square feet, i.e. 7.9 million square feet will be added in 2011 and its projected that 10 million square feet will be absorbed thereby decreasing the existing vacancy rate of all existing medical office. This fact alone will keep investors developing and acquiring more product and lenders funding these transactions.
