RCA Insights

Spotlight on the US Medical Office Sector

By on August 12th, 2019

The U.S. medical office sector recovered in the second quarter, following a sharp drop in growth seen during the first three months of 2019. The pace of decline shrank to 5% year-over-year from a 33% drop in the first quarter. However, the headline figures are a bit misleading since the improving momentum was largely due to one deal.

Welltower purchased a portfolio of 50 medical office buildings from CNL Healthcare in June. Without the $1b+ in volume from this one deal, activity for the quarter would be down 36% YOY. Individual asset sale volume fell 32% YOY in the second quarter. Despite this recent weakness, doom and gloom is not the order of the day for the sector.

1908 RCA medical office MAIN_1

With most medical office assets in suburban locations, pricing for these assets is often related to suburban offices overall. Pricing remains tight for medical offices, with cap rates averaging 6.6% in Q2 2019, lower than the average 7.0% cap rate for suburban offices. Earlier in the cycle, however, cap rates for medical offices were much closer to those for suburban assets.

This article is an excerpt from a longer analysis of the U.S. medical office market published in the latest edition of US Capital Trends. If you are a Real Capital Analytics client, log into the RCA website to download The Big Picture report and reports for the five major property types. To learn more about RCA’s data and publications, contact us.

Jim Costello

Jim Costello

Senior Vice President

Jim Costello has worked in the CRE space on issues of urban economics since 1990, including a 20-year stint at Torto Wheaton Research. Jim expanded the reach of the Torto Wheaton Research team developing forecasts of global market fundamentals. He also developed approaches to pair the forecast results with frameworks to answer investor questions on asset values and relative investment opportunities.

In the aftermath of the Global Financial Crisis, Jim provided advice to the Treasury Department and helped educate these professionals on commercial real estate performance. Jim is a member of the Commercial Board of Governors of the Mortgage Bankers Administration, where he helps policy makers understand the commercial real estate industry.

Jim is expanding the capabilities of the Real Capital Analytics team on issues of real estate market dynamics. Jim has a master’s degree in economics and is a member of the Counselors of Real Estate.