Why Invest in Medical Office Buildings?

July 19, 2018

Why Invest in Medical Office Buildings?

Medical office buildings or MOBs for short, cast a wide meaning in commercial real estate – they can be anything from a small building used by a dentist or optometrist, to senior care facilities, or to a large hospital campus. To date, Northstar has built 5 MOB assets for tenants across the U.S., and we believe this niche market still has a lot of growth potential. There are a variety of reasons to look towards MOB projects – anywhere from high-value tenants, to long-term leases. Today we’ll talk about why you should consider adding medical office buildings to your investment portfolio.

Market demand

  • Aging populations – Baby boomers are in the midst of retiring – some estimating about 10,000 per day.  It’s an unfortunate impact of aging – the older a population gets, the higher number of doctors’ visits that occur. According to the Centers for Disease Control, those under the age of 64 tend to average 3 doctors visit per year, whereas those over the age of 65 average nearly 7 visits per year. This shows that with an aging population, along with heightened visits, means a demand for additional medical office space exists.
  • Rise of Specialist – According to a recent survey, demand for medical specialists is on an upward trajectory. The study was run by Merritt Hawkins, and says “It is specialists such as cardiologists, orthopedic surgeons, pulmonologists, and others who care for the ailing organs, bones, and brains of our fastest-growing patient cohort – seniors, who are disproportionate users of care.” If the trajectory continues, then more and more specialists will need spaces to practice.
  • Millennial growth – Over the past 70 years, if someone mentions a growing population, they immediately point to “baby boomers” as the biggest age group. Well, that’s already changed – millennials actually have about 7 million more people than baby boomers. If that’s any indication, then the MOB market will continue to grow.

High Quality tenants and leases

  • High credit tenants – Because you’re dealing with tenants who typically have the backing of state, federal, or local governments, these tenants typically have solid financials, and are less likely to default. Additionally, doctors simply earn a lot of money. This makes them attractive tenants who typically have stronger credit.
  • Long-term leases – Medical equipment is hard and expensive to move. It’s not as simple as picking up a laptop, desk, and chair and moving offices. MRI machines are enormous and valuable, X-Ray machines are the same – these are machines that can cost hundreds of thousands of dollars. MOBs typically do not have high turn-over which reduces the amount of leasing commissions and tenant improvements the asset needs over time.

Longevity, Subsidies, and Locations

  • Desirable Location – Medical Office Buildings have the benefit of being located in either highly sought-after centralized locations in downtown areas, or in suburban environments with cheaper land. Both have their benefits. The main thing they want to focus on, is being close to other medical centers or hospitals. Older people tend to have a lot of doctors they need to see (i.e. general practitioner, diabetes specialist, cancer specialist, dementia, orthopedist, etc…). It’s not uncommon for a retiree to see 3 or 4 doctors in a day or week, and this makes convenience of the utmost importance.
  • Government subsidies – If a medical office building is a public hospital, then the developer will have a number of options when it comes to subsidies. Many times, both cities and counties will offer attractive packages to ensure a hospital will get built in a specific location – and for good reason. Once a hospital is brought to an area, both jobs are created, and the surrounding real estate value tends to increase.
  • Longevity – Doctors typically have a very low turnover rate. Once someone goes through years of medical school and residency, while typically being $100,000 in debt – along with an emotional attachment to helping patients, doctors at the very least have a financial obligation to work incredibly hard to get out of debt. Because of that, doctors have one of the lowest turnover rates in comparison to other professions.

Based on study’s we’ve run, industry experts we’ve spoken to, and our prior successes in the space, we think that medical office building developments is an attractive market to focus our time on.

If you would like to learn more about Northstar’s developments, or have any questions regarding MOBs, then feel free to contact investorrelations@northstarcp.com. Additionally, keep an eye on our investor portal for any new or upcoming MOB investments:https://invest.northstarcommercialpartners.com/