Laramar Group mid-year 2024 review shows high occupancy rates, strong demand

August 15, 2024 – As the healthcare delivery system continues to shift toward outpatient care, a mid-year medical office review by The Laramar Group, a leading national real estate investment firm, shows a positive outlook for occupancy, rent growth, and long-term demand.

An aging population and shifting healthcare delivery dynamics have pushed medical office properties to the forefront for many investors looking for stability and long-term growth. The number of people who are at least 80 years old is on track to increase by 50% during the next decade. This dynamic is expected to create rapid growth in outpatient volume and drive investor demand for medical office properties.

“The long-term outlook for medical office properties is favorable, given the continuing shift toward outpatient locations that provide proximity and convenience to support the aging population,” said Ben Slad, Senior Vice President of Investments for Laramar. “We expect to see continued growth and demand in the medical office sector.”

Occupancy rates for medical properties have remained above 90% since the end of 2010, demonstrating the stability of this asset type. Medical office rents have also been positive, growing by 4% from Q4 2022 to Q4 2023. Additionally, net absorption for medical office properties in 2023 was 16.9 million square feet, exceeding pre-pandemic levels, according to JLL research.

The nature of most work done by healthcare professionals, including x-rays, blood draws, minor surgery and dental work, requires special equipment and facilities as well as patient in-person visits. While more than 40% of information, tech, professional and business services employees now work from home, the vast majority of healthcare workers either work in a medical office or a hospital. According to the 2021 American Community Survey, just 10% of healthcare workers reported that they worked primarily from home. Medical office, therefore, has not faced the structural change occurring in the traditional office sector.

An additional demand driver has been the increasing share of the insured U.S. population.  The share of the U.S. population that has health insurance has increased from 81% to 90%.  The increase in the insured population continues to elevate demand for physician visits as uninsured persons typically do not visit doctors or seek medical care.

Rising construction costs and interest rates have contributed to muted supply. While deliveries in 2023 were on par with 2022, construction starts fell nearly 45% due to elevated borrowing and construction costs, according to Colliers research. In 2023, new starts declined from 16.2 million square feet to 8.9 million square feet.

Despite a multitude of demand factors, future medical office deliveries are projected to remain below the 17-year average.  Because of the high cost to build out a medical office space and proximity to patients, medical office tenants tend to remain in the same space for longer providing stable occupancy.  Since 2009, medical tenant retention has averaged in the low 80% range and is currently 82.3%.

Lastly, on a national level, healthcare expenditures have been rising substantially since 1970.  National healthcare expenditures as a percentage of GDP were 7.5% in 1970 and are projected to rise to 20% of GDP by 2030.  The current share of healthcare spending is outsized for the 65+ age cohort, who comprise 18% of the population but account for 36% of medical expenditures annually.

Healthcare services remain essential regardless of economic conditions. Demographic trends, muted supply and increased insurance coverage are driving long-term growth in medical office demand. These investments can offer strong returns, portfolio stability, and diversification across economic cycles, positioning this asset class as a strategic choice in the current real estate market.

The Laramar Group invests in medical office properties through its Laramar Medical Properties Funds, which are focused on generating consistent distributable cash flow balanced with value-add upside that the firm believes will result in superior risk-adjusted returns. Through its Funds, Laramar has closed on 9 assets across targeted U.S. markets since 2021. The Funds are focused on multi-tenant assets with health system, credit or dominant regional tenancy, favorable WALT, diversified medical uses, and assets that offer opportunities to enhance value through increased occupancy and building improvements.