Investors crowd back into US medical office buildings

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Despite the significant turbulence in global financial markets, reflecting the Russia/Ukraine war and inflation fears, the fundamentals of the US health care market in 2022 remain extremely positive.

Key sectoral trends

The Revista 2022 Medical Real Estate Forum in San Diego, the key healthcare conference in the US, was held recently. There was consensus on the following points:

  1. Healthcare real estate has again demonstrated its resilience over the past year.
  2. Given the uncertain economic outlook, there has been phenomenal growth in the number of new investors into the healthcare real estate sector. This is driven by a move out of equities and into “safe haven” assets. Historically, real estate has offered investors a hedge against inflation, because it provides capital protection and a rising income stream.
  3. Rental rates are expected to increase, not by the 2-2.5% per year seen in recent years, but by 3% p.a.
  4. As it becomes costlier to construct new buildings, the capital value of older buildings will also increase, firstly because replacement costs are higher and secondly because net operating income (NOI) is growing on the back of higher rentals.
  5. Equity markets are expected to move sideways for the next couple of years, which limits investor choices, both in the US and other countries.

Graphs presented by Revista at the conference showed that the fourth quarter of 2021 was a record for transactions in medical office buildings (MOBs). In that quarter, $6.6 billion of deals occurred, considerably exceeding the previous quarterly peak of $4.9 billion deals in the second quarter of 2017.

This was further supported by data showing employment numbers in the offices of physicians in the US had fully recovered from the 2020-21 Covid-19-related dip by December 2021, when they were back to February 2020 levels of 2.7 million people.

Effect of rising interest rates

Amid current fears of runaway inflation, the US Federal Reserve, and other central banks, are expected to continue hiking interest rates. The Fed has indicated it will implement six 25 basis point interest rate hikes over the next year to 18 months, which equates to a total increase of 1.5%.

Most banks have already factored these moves into their lending rates, so rate increases have initially been dramatic, but thereafter should be gradual. Inevitably, higher interest rates are impacting the pricing of real estate transactions, reducing yields and cash-on-cash returns.

“This requires investors to adjust their expectations,” OrbVest CEO Martin Freeman said.

“Within this environment, it still remains realistic to expect that OrbVest can generate between 6% and 7.5% cash on cash returns per year and double-digit total returns (IRR) when the buildings are sold.”

OrbVest’s primary reason for existing is to provide an investment solution for individuals and companies around the world that are seeking dollar dividends and an inflation-proof asset in times of volatility.

“We are constantly re-assessing and adjusting our business model to match evolving market conditions,” Freeman said.

“In an increasingly competitive market for prime assets, OrbVest is able to tap the relationships it has built up with brokers and providers of these assets. That enables us to continue to secure almost 75% of our deals off-market, providing a sustainable pipeline to meet investor expectations.”

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