There is a growing interest in learning to invest in medical office building (MOB) real estate properties – and for good reason. Doctors in particular are uniquely positioned to take advantage of this.
To help discuss why and what makes learning to invest in medical properties worthwhile, I asked Alan Donenfeld, key resource and CEO/Founder at CityVest, to help. He is well positioned to answer these questions as CityVest now offers private investments in medical office building available to its private investors, including many doctors.
The current MOB investment landscape
While the overall office real estate asset class has suffered significantly over the last several years, medical office real estate has been overlooked and appears undervalued.
MOBs are now attracting more attention from experienced real estate asset managers. Medical office real estate has strong underlying fundamentals, an exceptional growth trend, high occupancy, long-term tenant leases and resilience in all economic environments.
Given the current economy and real estate market conditions, investing in medical office buildings is highly attractive. While nothing is for sure, it is a stable investment with solid upside potential. To invest in medical properties also offers an opportunity to diversify an investment portfolio, whether it already includes real estate or not.
Let’s examine 5 great reasons to invest in medical properties!
5 Reasons to invest in medical properties
In no particular order…
1. Economic Resilience
The health care industry as a whole has shown remarkable resilience through economic cycles, including the recent pandemic.
(Remember, doctors did not all come out fine after the pandemic. But for better or worse, the healthcare industry did come out fine. Is this right? I’d say no. That’s why financial freedom for doctors is so important. But investing in MOBs does give you an opportunity to benefit from this injustice…)
The need for health care and treatment of patients is not subject to downturns due to economic and market conditions. In fact, just the opposite. The health care industry is a growing sector.
There has been a steady rise in the desire to receive health care in convenient outpatient settings to avoid the cost associated with traditional hospital care.
Advancements in technology and clinical innovation, along with a change in patient preferences, lead to a growth in demand for outpatient health care services. The combination of convenient locations and significantly lower costs than a hospital results in an increasing desire for medical office space.
2. High Occupancy Rate
Over the last decade, the trend in the management of health care is to treat patients through medical offices rather than through traditional hospitals. This expansion has led to medical office buildings providing a range of specialized services. These include imaging, labs, surgery facilities and urgent care facilities. Being part of a medical office building eco-system has become highly desirable to treat patients due to its single building setting outside the local hospital.
Given the range of complimentary services and convenience, health care provider tenants rarely relocate leading to high occupancy rates. In addition to high occupancy, medical office building tenants agree to long-term leases. Lease lengths typically have a duration of 5 to 10 years. These medical tenants also tend to have strong financial credit. These long-term leases along with financially sound tenants provides MOB investors with a predictable rental income stream with payments that are timely and rarely fall into default.
3. High Retention Rates – Predictable Revenue Streams
Given that MOB tenants usually remain in the same location for extended periods of time, they accept lease terms with steady rent increases.
Physicians typically choose long lease terms. They want to remain in one location in close proximity to their patients and hospital services. In addition, medical offices usually have unique buildouts. This results in a high cost of relocating and high retention rates.
Another benefit of the MOB to a health care provider is that there are related medical services offered in the building such as surgery rooms, imaging, and labs.
The combination of benefits from the medical office building results in the medical service tenants acquiescing to steady rent increases. For investors, these long leases and high retention rates are indicative of the sector’s stable and increasingly valuable predictable revenue stream.
4. Diverse Tenant Base
Another benefit of medical office building investments is its diverse tenant base.
Medical office buildings can have a range of tenants. Tenants may include primary doctors, plastic surgeons, women’s health, dermatologists, oncologists, kidney dialysis centers, labs, and imaging services.
These tenants have a steady income from co-pays and out-of-pocket payments. they also receive insurance and governmental reimbursements.
5. Growth in Demand
Medical office buildings are experiencing the same sort of valuation drivers as multifamily real estate. Namely, steadily increasing values due to strong demand, rising rents and high occupancy. And the fundamental reason for the strong valuations is similar – population trends.
In multifamily, there is enormous real estate demand resulting from family formation by 77 million Millennials. Similarly, the gray tsunami from 75 million Baby Boomers is upon us.
Over 4 million more Americans are turning 65 years old this year. By 2030, all Baby Boomers will have turned 65 years old, with many over 80 years old. Baby Boomers will require an exponentially increasing amount of medical care year after year for the next 25 years.
To meet the demand, health care service providers require medical office buildings to provide the services. The top three health care REITS have grown significantly to a combined market cap over $70 billion.
Putting a bow on it
An increased demand for medical care and medical office buildings will continue as people seek more efficient, convenient, and accessible medical care. For real estate investors seeking a recession-resistant investment, growing demand, and increasing rents and values, learning to invest medical office building properties is a sound strategy.
If you are interested, you can learn more about this on CityVest’s unique site for PPS members.
My anecdotal experience
Selenid and I have not yet invested in medical office buildings. We have our real estate investing niche and are thus far sticking to that strategy.
However, I imagine in the future we will invest in MOBs.
For the same reason that I would likely invest into a surgery center. Or that most doctors clamor to buy into their own MOB. We understand healthcare and how it works. We see the value of multiple medical resources and cost centers being located in one building.
Investing in a fund or private offering in MOBs is a great opportunity to do just this for those without ready access to investing in there own medical building…like me.
And my last anecdotal story to share is from my step-dad who is a physical therapist. He has a great spot in a MOB. His lease recently came up and it was unfortunately the building owner who had a lot of leverage with a ton of practices wanting to jump into their spot. And this was during the pandemic. In Buffalo, NY – not a prime market. So the demand seems to be high!
So again, if you are interested, you can learn more about investing in MOBs here or you can reach Alan Donenfeld directly at 917-747-3091.
And if you are looking to learn more about other ways to invest in real estate, check out these posts!
- The Real Estate Flywheel Effect for Successful Physician Investors
- A Real Estate Investing Guide for Physicians
- Should Doctors Invest in Real Estate Just for the Taxes?
- 5 Biggest Downsides of Real Estate Investing
What do you think? Have you invest in medial real estate? What was your experience like? Where do you see the market going? Let me know in the comments below!