• Americas

Pulse of Medical Office Investments Remains Steady

by Lorie Damon, Managing Director, Healthcare Practice Group

Investors Brace for Effects of Future Legislation

The U.S. healthcare industry is closely monitoring proposed legislation, as well as President Trump’s Executive Orders and other actions, unfolding in Washington, D.C. The Republican-controlled House and Senate are intently focused on replacing the Affordable Care Act (or “Obamacare”) with the American Health Care Act (AHCA) currently under review by the Senate. AHCA would reduce federal deficits by $119 billion over the coming decade but will disrupt current coverage, leaving more Americans unable to buy insurance and increasing the number of uninsured by 23 million by 2026, relative to current drafts of the proposed law.

The ACHA legislative impact, if passed, will complement a number of other regulatory actions and directives that will continue to have significant impacts on the healthcare industry, particularly in terms of how care is paid for, and by whom. In Cushman & Wakefield’s most recent issue of Vital Signs, we discuss how these uncertainties in the legislative arena could potentially affect healthcare systems and medical office building (MOB) investments.


Although the demand in the MOB sector dipped slightly in 2016, with some investors and developers exploring the option to divest, the sector remains very strong. 2016 net absorption in MOB properties totaled 18.7 million square feet (msf), a 3.8-msf increase from the prior year. First quarter 2017 saw continued demand with net absorption of 1.9 msf, but was less than one-half the quarterly average of 4.6 msf in 2016, though such drop off is not atypical in the first quarter of any year. Further reflecting demand on steroids, Healthcare Trust of America announced on May 1 its blockbuster deal to purchase the entire Duke Realty Medical Office business, including not only its real estate portfolio and development pipeline but also its operating business, for a reported $2.75 billion.

Vacancy rates have continued to decline, reaching 7.9% overall for the first quarter 2017, down from 8.7% one year prior. In the 26 major U.S. medical markets tracked by Cushman & Wakefield, all but two showed occupancy gains in 2016, and 17 showed continued gains in Q1 2017. In terms of square footage, Atlanta, Tampa, Washington, and Denver showed the strongest net absorption levels during Q1.

Nationwide, asking rents for full service gross leases showed modest gains again, up to $21.99 psf in the first quarter of 2017 from $21.72 in first quarter 2016. Several markets such as New York, Pittsburgh, San Diego, and Boston showed substantial year-over-year rent growth.

MOB developers report that access to capital—both debt and equity—is strong for specific kinds of healthcare projects, namely those that are anchored or sponsored by a health system or a large physician group.

All very encouraging news, right?

Yes and no. While market conditions tell a very positive story, the high volume of investors entering this sector in the last few years ($9.4 billion in U.S. sales in 2016 alone) are doing so without a clear understanding of how legislation could affect the value of a MOB investment, leaving them exposed to greater risk. In addition to legislative ambiguity investors are also concerned about the impact of an interest rate hike.


The collective of the following legislative unknowns could have a direct bearing on the number of tenants, the ability of those tenants to pay their rent, and the speed at which assets get traded.

Immigration. U.S. immigration policy may accelerate the physician shortage and create challenges for future recruiting of foreign students who wish to attend medical school and train in the U.S., many of whom elect to remain here and practice under H1B1 visas. This will directly impact MOB tenant base.

MACRA and ACA. The Medicare Access and CHIP Reauthorization Act (MACRA) and ACA drive how much physician get paid to provide healthcare services (trending downward) which directly impacts their ability to pay rent. Should the AHCA become law, fewer patients will be paying patients. Because an estimated 80% of MOBs are owned by hospital/health systems, their physician tenants’ ability (or inability) to pay rent impacts health systems’ strategy regarding owning or divesting their MOB portfolio.

Credit Rating Agencies’ Dour View. Moody’s recently rated the proposed AHCA as credit negative for U.S. healthcare companies. Citing Congressional Budget Office estimates, Moody’s noted that as health insurance becomes less affordable, and the rates of uninsured rise, demand for healthcare services would likely drop and health systems’ bad debt expense would rise, as they would bear the cost of covering emergent cases for the uninsured.


While MOB demand remains strong, many health systems are adopting a cautious level of expansion while the future of healthcare policy remains unclear. Healthcare providers and their real estate partners have historically proven adept at adapting to changing market conditions and patient needs. Many healthcare providers have indicated that they do not expect to alter their strategic plans and directives without greater certainty on the reimbursement environment. Such steadiness in the face of rapidly changing dynamics should serve healthcare providers and their real estate partners well.

Lorie leads Cushman & Wakefield’s Healthcare Practice Group, working with team members and clients across the country to promote Cushman & Wakefield’s leadership and best practices in healthcare real estate leasing, management, and transactions across the continuum of healthcare assets.

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