By Jim Costello on July 6th, 2021
Commercial real estate investors are turning towards alternative real estate sectors in search of better growth opportunities. This search for new opportunities has turned investor attention to the medical office sector, with pricing now at a premium relative to suburban offices. That comparison is apt as most medical office buildings are in suburban locales.
There was no discernable spread between cap rates for suburban offices generally and medical office buildings from 2002 to 2015. Since 2016, however, cap rates for medical offices have compressed to a greater degree and averaged 20 basis points (bps) lower than suburban offices from Q1 2016 to Q1 2021. In the first quarter of 2021 this spread stood at 25 bps, with an average 6.5% cap rate for medical office properties across the U.S.
Prices for medical office buildings have held up better than suburban office assets throughout the pandemic so far. The RCA CPPI for suburban offices declined at a 0.7% year-over-year pace into Q3 2020 but has subsequently rebounded to a 2.7% pace of growth into Q1 2021.
Price growth for medical offices was not as volatile. The RCA CPPI for medical offices eased to a low of 2.5% annual growth into Q3 2020 but stood at a 2.8% pace by Q1 2021. Investors have been more optimistic about the medical office sector, understanding that an aging population requires more medical intervention.
Reflecting the outperformance on pricing, deal activity for medical offices did not retreat as much as suburban offices during the pandemic. At the worst in Q2 2020, medical office deal volume fell only 41% year-over-year versus the 64% decline for suburban offices.
© Real Capital Analytics
A version of this article first appeared in the May edition of US Capital Trends. Clients of Real Capital Analytics <<click here>> to download the PDFs and data files for this edition.
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