Last week, Cushman & Wakefield’s Atlanta office hosted an event focused on the healthcare industry. Ken Leonczyk of The Advisory Board shared his thoughts on navigating disruption, consolidation and cost pressure, followed by a panel of speakers from several of Cushman & Wakefield’s service lines. Lorie Damon, Managing Director of the firm’s Healthcare Advisory Practice, provided a high-level look at where the industry stands nationally.
Rapid growth of the over 65 population drives demand for healthcare services and has helped spark the long trend of continuing growth in healthcare employment, which, in turn, leads to rising demand for medical space, Damon said. Total employment in the health care sector has roughly doubled in the nearly three decades since 1990 as its share of total U.S. employment has increased from 7.3% in 1990 to 10.8% currently. That share is likely to continue rising.
After trending lower for seven years after the 2008-2009 recession, the national vacancy rate for medical office buildings stabilized in 2017 and has remained flat between 10.8% and 10.7% for the past two years. At 10.7% in the fourth quarter of 2018, the national vacancy rate is at a 10-year low and has remained at a level low enough to put upward pressure on gross rents, which increased approximately 3.4% in the fourth quarter compared to a year ago.
In Atlanta, vacancy dropped to 10.3% in the first quarter of 2019, down from 10.6% in the first quarter of 2018. Over that same time period, rents climbed from $24.52 per square foot (psf) to $25.11 psf. Class A medical office buildings (MOBs) in sought after in-town locations have seen dramatic increases in rental rates that buck the historical growth patterns and previous gross rate ceilings of the low $30 psf range. Five years ago ,the best MOBs on Pill Hill, along with other leading in-town MOBs – Piedmont West and Emory Midtown – represented the top of the market in the $30 psf to $32 psf range. Today, those buildings achieve $35 psf to $37 psf, while newly developed MOBs are exceeding $40 psf, breaking a threshold that seemed unachievable in this land-rich metro just two years ago.
Medical office investment sales continue to be quite strong, as demand for this product type significantly outpaces supply. In fact, Atlanta was the No. 1. U.S. investment market for MOB product in 2017 and 2018, with $1.60 billion in transaction volume according to Real Capital Analytics. From 2015 to 2018, 63 MOB properties in Atlanta traded, with an average deal size of $18.4 million. The average price psf climbed from $221 psf to $340 psf over that time.
To request a copy of the presentation, reach out to a member of our Healthcare team here.