Aging U.S. population to fuel demand for medical office space in 2018

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The aging U.S. population will be a significant tailwind for medical office demand in the years ahead, according to CBRE’s 2018 U.S. Real Estate Market Outlook.

“We expect demand for medical office buildings to grow, fueled by a shift away from the delivery of patient services on hospital campuses, the adoption of new technology, the aging population, health care job growth, tight market conditions and the relative recession-resistance of these properties,” said Andrea Cross, Americas head of office research, CBRE.

The population aged 65 and above is expected to increase by 1.7 million (3.3 percent) in 2018 and by 9.2 million (18 percent) over the next five years, driving short- and long-term demand for medical services. Health care employment has jumped by 47 percent since 2000, compared with 12 percent for total employment, and it has weathered the past two recessions well. The education and health services sector is expected to add nearly 1 million jobs over the next five years — the second-highest total among the major employment sectors.

“Medical providers are willing to sign long-term leases for locations near large patient populations and buildings that are well-equipped to offer specialized services like dialysis centers or ambulatory surgery centers,” said Jim Hayden, executive managing director, Healthcare, Global Workplace Solutions, CBRE. “Providers looking to reduce costs and make their services more easily accessible to patients will also shift to lower-cost settings like retail centers.”

The medical office market has performed well in recent years, registering a lower peak vacancy rate than traditional office properties during the 2008 recession and showing a steady decline in vacancy during the recovery. Net absorption has outpaced new supply in 24 of the past 29 quarters, with particularly large imbalances since 2015.

Gross asking rents have been stable, reflecting consistent user demand and long lease terms that limit tenant turnover. New medical space completions have also been low relative to pre-recession levels, and the amount of space under construction has decreased slightly from the Q2 2016 peak.

“Investment trends reflect strong medical-office market fundamentals and a broadening pool of interested investors,” said Chris Bodnar, vice chairman, Healthcare, CBRE Capital Markets. “While uncertainty about health care policy poses a risk to the medical office market, favorable demographic trends point to continued strong health care demand, regardless of any policy changes.”

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