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
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A word on risk
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