erate the pace of large-scale transactions like the aforementioned in the coming months. “There will not be as many
portfolio sales in the fourth quarter and in the first two quarters of 2009 as there would have been if there was liquidity in
the market,” says the Indianapolis-based executive. “When
liquidity normalizes to any degree, healthcare portfolios will
return to normal pricing. There probably has been upward
pressure of 25 to 50 basis points on valuations as compared to
50 to 150 basis points in traditional office or other product
The most current data for medical office reported a marginal increase in pricing during the first half of the year.
According to RCA, the asset class was trading at an average of
$237 per sf in the second quarter, a 6% hike from last year.
Marcus & Millichap recorded an average growth of 2% in the
first half to $211 per sf. Pontius says that prices have since softened due to the lack of liquidity, which is keeping some players
on the sidelines. While Fasulo agrees with that assessment, he
contends that pricing has held up much better for medical
office than other property types. However, many of the deals
that have closed since June, he points out, have been smaller
assets worth less than $20 million.
The Cirrus Group has kept a keen eye out for such opportunities, closing a number of modest-sized healthcare transactions this year. At the end of September, the company purchased a 40,000-sf rehabilitation center in San Antonio for
$12.5 million. A few months prior to that it bought a $6.5-mil-
lion, 15,000-sf property in Phoenix, which is being refurbished for use by a spinal cord and brain injury rehab tenant.
“I have seen the opportunity count go up because there has
been a shortage of buyers since capital is difficult to access.
Naturally, you are going to see more supply than you have in
the past, but for good projects, there are still good buyers,”
One of the most alluring aspects of medical office is the
prospect of sustainable demand, which is anticipated to grow
exponentially in the coming years. Between 2010 and 2020
the number of people age 65 and over will increase by 36%,
compared to 9% for the general population, reports Grubb.
The US Census estimates that by 2050 there will be more than
85 million people age 65 and over. That population boom will
create a significant need for healthcare services and facilities.
Total public and private healthcare expenditures in the US
are expected to increase at an average annual rate of 6.7%
from 2007 to 2017, notes Grubb. Healthcare expenditures will
Grubb & Ellis Healthcare REIT picked up Oklahoma City Medical Portfolio for
approximately $29.3 million from Deaconess Portland MOB LP in September.
Located on the Deaconess Hospital campus, the package consists of two
assets with some 187,000 sf.
The Geneva Organization acquired its fourth medical office property this
October: the DaVita Dialysis Center in St. Louis Park, MN. Total Renal Care
occupies the entire 8,000-sf asset under a long-term, triple-net lease.
comprise 19.5% of the GDP in 2017, up from 16.3% in 2007.
With this litany of demand drivers, medical office development has surged in recent years, says Pontius. The average
annual construction delivery since 2000 has been about 8. 6
million sf; in 2007 roughly 16 million sf came onto the market, according to Marcus & Millichap. The firm had initially
predicted the addition of 17. 5 million sf of medical office
space this year, but Pontius expects that number will be
reduced. “The scrutiny on these investments, the flow of
capital, both on the debt and equity sides, is absolutely going
to slow down development even though demand is there to
support it,” he says.
A contraction in starts may be in order, as some observers
say the market got a little ahead of itself. Overall vacancy rose
60 basis points in the first half of the year due to a wealth of
deliveries, and Marcus & Millichap forecasts another 20-basis-
point increase that will bring the year-end vacancy rate to
11.1%. Elevated construction activity is expected to place
upward pressure on vacancies well into next year. Rents, consequently, have plateaued and are expected to remain flat until
Bremner contends that rents in BremnerDuke’s portfolio
are still increasing at historical rates. “We traditionally have
had somewhere between a 2% and 3% growth in rents and we
continue to see that. In fact, in some areas it’s consistently at
3%,” he says.
Prosky of Grubb & Ellis Healthcare also sees the cost of
leasing medical office space typically increasing 3% a year in
both good times and bad. “If you go back and look at office
and retail rents over the last decade or so, you had rents going
up 10% to 15% a year in certain markets and then dropping
10% to 15% a year,” he says. “You really don’t see that in the
In all, surplus supply will likely be absorbed at a steady pace
because of the continued decentralization of hospitals. Rather
than expanding, these institutions are shifting in-house functions to outpatient clinics and ambulatory care centers, according to the Grubb report. This trend is fueling leasing and
development alike. Just ask BremnerDuke. The company has
developed a number of medical office properties for hospitals,
including a 120,000-sf facility for St. Vincent Health in
Indianapolis that recently opened. The project has a freestanding emergency department, an ambulatory surgery center
and about 40,000 sf of physician space. The developer also