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Medical office sector earns a clean bill of health
Health care real estate should continue to grow in importance over the coming decades. Health care is the fastest growing sector in the U.S. economy and accounts for nearly one-fifth of GDP, according to the OECD Health Statistics.
These medical facilities in the U.S. recovered more quickly than many sectors of real estate during the pandemic, due to the essential services they provide. We expect that momentum to continue as the health care sector transforms over the coming years.
Medical offices play an increasingly important role
As health care evolves in the U.S., we believe more care will be delivered outside of hospitals in cost-effective settings such as medical offices. This is especially true for those that offer higher acuity services that cannot be delivered via telemedicine.
Higher acuity medical offices have historically boasted the strongest rent growth in the medical office sector. We believe these facilities will be insulated from a potential increase in telehealth going forward. This includes offices that provide traditional outpatient treatments like dental care and immunizations, as well as procedures previously provided in a hospital setting, such as hip and knee replacements, chemotherapy and radiology.
This shift is part of a nationwide effort to reduce health care costs, and is driving outpatient medical office demand. Hospital revenue from outpatient services has nearly doubled, from 28% in 1994 to 49% in 2018.
Like so many trends, the shift to telehealth accelerated during the pandemic. But even this change does not override our outlook for the sector. Medical office properties that cater to higher acuity procedures are most defensive to the increased trend of telemedicine, e-health and home health care.
Investing in the medical office sector requires a strategy built on both industry experience and collaboration with health care providers. We look for investments that are:
- Build-to-core strategies for development of medical office, backed by long-term credit tenancy of health care providers.
- Conversion opportunities from traditional office or retail to medical office to meet increasing health care demand and drive returns.
- Direct collaborations with the demand source, including hospitals and universities, to capitalize on complex health care ecosystems and underlying long-term demand.
Medical office performance and ownership
While we believe the pandemic will not negatively affect medical office values in general, it could cause hospitals and health systems – the largest owners of medical office properties – to consider selling their medical office holdings. These hospitals are focused on their core business, and they are anticipating shifting services driven by insurance models in the United States.
Demand is growing for new medical office services, as well as life science centers that conduct medical testing, research and development. Today, only a quarter of these properties are privately owned, but we expect that percentage to increase materially over the next decade.
In this issue
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
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A word on risk
Real estate investments are subject to various risks, including fluctuations in property values, higher expenses or lower income than expected, and potential environmental problems and liability. Please consider all risks carefully prior to investing in any particular strategy. A portfolio’s concentration in the real estate sector makes it subject to greater risk and volatility than other portfolios that are more diversified and its value may be substantially affected by economic events in the real estate industry. International investing involves risks, including risks related to foreign currency, limited liquidity particularly where the underlying asset comprises real estate, less government regulation in some jurisdictions, and the possibility of substantial volatility due to adverse political, economic or other developments.
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