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Looking for Capital Appreciation? Consider the MOB!

And when I say MOB, I’m talking about Medical Office Buildings. It’s an acronym.

This blog has no affiliation with the mob.

Let me start over. The idea for this post came from a great CoStar Group article published last month. In it, Randyl Drummer points out the uptick in medical office deals that’s resulted from changes in medical care, technology, demographics, and healthcare regulation (i.e., the Affordable Care Act).

Mr. Drummer explains,

Continued health-care employment growth, combined with the expected increase in demand for medical crae [sic] services from the aging population is expected to continue to drive development of medical ambulatory care facilities, including MOBs, surgery centers, urgent care clinics and diagnostic lab facilities.

The healthcare industry is the largest job creator in the country, and one of the largest drivers of economic activity in cities big and small. Healthcare, of course, is also extremely complicated, affected by large private interests, government agencies, and ever-changing rules. The fact that investors and developers are pursuing opportunities in the highly regulated healthcare sector–despite the layers of bureaucracy that often make medical establishments onerous for business interests–shows a great deal of confidence in the sector’s overall growth.

There’s no denying the demand for healthcare real estate. This is a product of both an aging population and increased availability of medical coverage (courtesy of Obamacare). But the additional capital demands this will create (for insurance companies, the government, employers, and individuals) will also result in greater demand for less expensive medical options. This is why the MOB–Goodfellas connotations aside–seems an especially promising niche in the healthcare real estate sector.

The CoStar article goes on to say,

Increasingly, MOB developers are expected to design more sophisticated facilities as hospitals move higher-acuity care such as post-surgical recovery and other complex procedures off the hospital grounds…

This, of course, highlights the great amount of opportunity for MOB developments and acquisitions in the vicinity of hospitals, since these properties are positioned to attract patients and practices connected to the hospital.

But more importantly, the trend mentioned above–that of outsourcing certain procedures from inpatient to outpatient facilities–will likely turn medical office buildings into more independent assets, rather than properties that depend on a neighboring hospital. As MOBs prove themselves as less costly alternatives to overnight hospital stays, appealing to both patients and their insurance companies, they will become viable in many new markets.

At this point, MOBs only represent a small portion of healthcare REITs’ portfolios. Only 17% of HCP Inc.’s holdings are medical office buildings, and this asset type represents a similarly small percentage of Ventas’s holdings.

I have a feeling this will change. While medical office buildings cost more per square foot than most Class A office properties, there is no cheaper alternative for the healthcare industry (aside from the “back alley” option, I guess).

Moreover, this is a very flexible asset type. Office, industrial, and retail spaces can be repurposed–albeit with heavy capital improvements–into MOBs. In fact, the CoStar article I mention above quotes one CRE professional who believes this asset type may be one solution to the many gaping vacancies left by bankrupt big-box stores (Borders, et al).  

At this point, it seems the most auspicious MOBs are built from the ground up, and frequently affiliated with major hospitals. Here are just a few announced in the last couple months:

Keep in mind, the Affordable Care Act and increased strain on the healthcare system will inevitably increase the competition in this industry. Those who invest in such healthcare real estate, particularly medical office buildings, would be wise to consider the possibility that the next lucrative lease or sale may not go to an already established healthcare system, but to a new, more privatized competitor.  
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