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Outpatient Medical Office Building Report - 2017
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Outpatient Medical Office Building Report - 2017

Record Year for Medical Office Building (MOB) Sector

2017 was a benchmark year for outpatient medical office buildings (MOBs), both in Indianapolis and around the country.

The past few years of activity have taken the MOB segment from an alternative real estate investment to one that is seen as a core asset class. The number of healthcare REITs have grown exponentially over the last several years, as the population continues to age and the demand for outpatient facilities continues to grow.

 

These REITs, along with private REITs and other buyers, were extremely active in 2017. Hammond Hanlon Camp’s most recent “Medical Office Building Update” shows that 2017 produced $7.6 billion of investment sale activity year-to-date. This number is “expected to far exceed 2016’s total dollar volume of $8.5 billion” (H2C).

A large chunk of the aforementioned $7.6 billion is the $2.8 billion transaction between Indianapolis-based Duke Realty Corporation and Healthcare Trust of America (HTA). Duke’s exit from the healthcare real estate sector resulted in a sale of its healthcare assets to HTA at a 4.8% cap rate, the lowest the healthcare real estate sector has ever seen. The Duke/HTA transaction, along with several others around the country, have led to a compression in MOB cap rates (see the graphs below):

 

mob cap rates

Source: Revista

 

Portfolio Premium

Source: Hammond Hanlon Camp LLC

 

Among the many takeaways from these graphs, is the fact that off campus MOBs are lockstep with on-campus in terms of cap rate compression, which has not been the case in previous years. This is partly due to the fact that health systems have invested in locations away from hospitals for reasons of cost containment and patient convenience. IU Health’s implementation of urgent care facilities across Indianapolis along with St. Vincent and Franciscan Health’s micro hospital developments are a few local examples of off-campus facility investments.

 

Indianapolis – Notable Transactions

The Indianapolis MOB marketplace saw some significant sale transactions in 2017:

 

PropertyTransaction DateCap RatePriceRSFPrice / SFBuyer
St. Vincent Fishers Hospital MOB6/30/20174.7%$54,769,720120,158$456DOC REIT
St. Vincent Carmel Women's Center6/30/20174.90%$39,130,28085,847$456DOC REIT
St. Vincent Primary Care Center* (Part of the Duke portfolio sale to HTA)6/22/20174.70%$36,600,00084,436$433Healthcare Trust of America
IU Health Mooresville4/11/20177.00%$4,180,00012,000$271Cornerstone Companies
Community Health Pavilion Anderson3/31/20176.30%$21,670,00068,624$316Welltower

 

 

The below table lists MOB construction projects in Indianapolis expected to close 2018-2019.

 

Property NameCityProjected OccupancySquare FeetValueDeveloper
Eye Surgeons of Indiana MOBIndianapolisQ1 201848,000$15,000,000Cornerstone Companies
Central Indiana Orthopedics MOBFishersQ2 201850,000$13,000,000Envoy
Dawes Fretzin Dermatology MOBIndianapolisQ4 201830,000$12,000,000Cornerstone Companies
Goodman Campbell Brain & Spine MOBCarmelQ1 201939,000$14,000,000Cornerstone Companies
Spec MOBCarmelQ1 201920,000TBDBrowning Investments

 

Leasing

mob sq analysis

 

Leasing activity in the Indianapolis area proved strong in growth markets, pushing both occupancy and rates. Markets in this category are typically in growing suburbs or rebounding urban areas. These stronger markets saw shrinking concessions, but longer term to cover rising construction costs. Hospitals continue to be the driving force in these locations.

 

Older markets and hospital campus see rising vacancy, especially in class B or lower buildings. Rates and occupancy in these situations have both been stagnate.

 

Property TypeProperty CountTotal SFTotal Value
Hospital9835,176$402,000,000
Medical Office Building5326,000$117,540,620
Total141,161,176$519,540,620

 

Construction costs continued to present a significant challenge to new leasing. Usable 2nd generation space is in high demand with inventory of the best conditioned space severely limited. In an effort to keep lease rates lower, some hospital systems have opted to self-fund larger portions of the tenant finish. Most new tenants expected to fund some portion of construction with a short-term lease.

What to Expect in 2018

There are no signs of the MOB sector slowing its frenetic pace in 2018, especially as interest rates remain as low as they have been for years. Many proactive health systems continue to plan on- and off-campus MOB developments in order to move services away from the more expensive inpatient models of the past. The efficient capital that healthcare REITs are able to obtain will keep them heavily active on the investment sale side.

The sector does have some threats going forward. If healthcare reform is passed through the House and Senate chambers in Washington, health systems might look to plan a bit differently in the long term. However, as long as lower reimbursement rates remain, outpatient MOBs will be a necessity for health systems and their continuous quest to curb the cost of healthcare.

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Indianapolis, IN 46260

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