Real Estate Journal — 2016 Forecast — January 15 - 28, 2016 — 17A


M id A tlantic

2016 F orecast

s we move into 2016, an aging U.S. population will continue to boost an By David Beyel, Marcus & Millichap Momentum to continue; Older medical office builds to be tested in 2016 A

emerging trends. Additionally, leasing of older product will become more dif- ficult, especially for spaces of smaller size. Consolidation is pulling private doctors out of the current spaces and push- ing them into larger and/or newer spaces already leased by the hospitals or larger healthcare groups. As this has happened in some capacity in the past, these vacancies had experienced leases with a new generation of private doctors’ practices. Moving forward, fewer doctors are venturing

out on their own, leaving a smaller pool of tenants in the market for smaller floor plans. Sales in 2015 accelerated 10%, also pushing the average price 23% to $240 psf. Although prices can vary widely, the average cap rate compressed 20 basis points to 7.3%, ap- proaching pre-recession levels. Looking forward, capitalization rates will remain aggressive. As was the case in 2015, on campus assets will lead way; capitaliza- tion rates in some cases execut- ing below six%. Single tenant product will be next in line,

followed by multi-tenant assets. Core, class A, Investment Grade assets will continue to be dominated by REITS and institutional players. However, as these REITs cost of capital has recently increased, expect them to compete less aggres- sively this year on secondary and tertiary assets. Private capital, which accounted for nearly 50% of MOB invest- ment in 2015, will continue to compete more aggressively on stabilized assets, and will continue to dominate the value- add air space. n

large multi-tenant medical office buildings housing physi- cians and outpatient services closer to residential and retail developments. U.S. medical office vacancy dropped 20 basis points in 2015 on net absorption of more than six million s/f , ending the year at 9.4%. Despite the surge in completion of new product, the majority of space coming online will be pre-leased and condi- tions will continue to tighten. However, antiquated medical office buildings will struggle to keep up with ongoing and

already thriv- ing Medical Office mar- ket. The 65- plus popula- tion will rise by nearly 42% over the next 10 years as more that 20

David Beyel

million people will join this age cohort. As medicine advances and people are living longer, that 65-plus age group will account for 20% of the total population. As a result of this increase over the next decade, healthcare hiring and hiring in related industries will rise by 17% in order to meet the increased demand of what some are referring to as the “Silver Tsunami.” Current numbers suggest there is to be some concern for a physician short- age, however this age-related trend bodes well for medical office assets. In addition to an aging popu- lation, a revitalization of health- care delivery will also bode well for medical office product. As multiple market influences have increased the costs of inpatient care, providers are being pushed to place medical services in the local community. Enhanced technology and con- tinuing medical advances will allow for a greater level of ser- vice in an outpatient setting. In addition, medical office product has taken on a more retail-like design and setting, with a focus on easier access and traffic and demographic trends. For these reasons, newer medical office buildings will continue to see aggressive investment activity. Capitalization rates at these locations will vary dependent on the type of care adminis- tered, location, lease term, and tenant credit. As larger health- care institutions and providers continue to consolidate, we will continue to see a boost in tenant credit as private doctors and private practice leases transfer to local, regional, and national healthcare systems. An estimated 12.2 million s/f of medical space will come online in 2016, with just 7.5 mil- lion s/f having been delivered in 2015. A large share of space to be delivered in 2016 will be off-campus development of am- bulatory surgery centers, stand- alone emergency departments,

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