Posted on: 30 Oct 2020 | By: Martin Freeman, Chief Executive Officer, Orbvest
Think about your doctor, your local radiology or pathology laboratory, or even your dentist. How often have they moved in the last 10 years?
Over the last few years there is increasing interest in the commercial real estate segment referred to as medical office buildings, or MOB. Reports like the DLA piper market survey in 2018 rated the specialized healthcare investment sector most attractive for investors, with a 56% approval rating by investors, and the hypothesis is that the sector is going to continue to get stronger over the next decade and beyond, specifically in the USA.
The ultimate test came in the form of COVID 19, which has proved that MOB’s as a category of real estate were relatively unaffected by the largest disruption to the world economy since the second world war. In fact, most companies in the healthcare niche in the USA, have been virtually unaffected by the effect of the Corona Virus and healthcare real estate investment is experiencing renewed interest from around the world.
What is specialised health care, what are MOB’s and why should I invest in them?
Medical office buildings are usually smaller specialised buildings used by independent medical practitioners, specialists services including imaging, pathology, dialysis, oncology, surgery centres and a plethora of new service providers emerging as a result of advancement in technology. These service providers simply don’t need the overhead of full service hospitals anymore and can provide a more personal, localised and patient-centric service to their patients in their own premises.
Put simply, advancements in technology is moving patients out of the traditional hospital networks to more convenient and cost effective treatment.
Healthcare is on the brink of a revolution and an unprecedented rise in personalized and intelligent health care. Transformative technologies including genome sequencing and artificial intelligence amongst others, bring incredible power to diagnostics, drug discovery and genetic therapy, and will have a major impact on longevity.
This sector is underpinned by demographic growth with an increasing number of senior citizens aging, and as a result consuming more healthcare services. Put simply, people in the US over 65 years old visit a doctor 6 times more often than the younger demographic, and more than 10 000 baby boomers are turning 65 every day. The U.S.A is expected to double its number of senior citizens older than 65 years by 2050 to exceed 80 million people.
And these seniors are also migrating to warmer parts of the country as retirees move to states including Florida, Texas, Arizona and Georgia to name a few, which has increased demand for these new more personal and patient centric buildings dramatically in these areas.
Medical practitioners in the USA are high quality tenants who are often supported by large government healthcare funding most notably Medicaid and Medicare, but the majority of Americans have some form of medical insurance. These insurance companies are significantly large, and have solid financials that underpin the cash flows of the entire healthcare system.
Medical tenants are mostly well diversified in medical buildings and are highly unlikely to leave since they require specialized infrastructure and equipment and they are dependent on one another to provide inter-related services to patients; therefore, they typically sign long-term leases allowing them to remain in one location. With medical facilities being so well regulated and specific in their requirements, that as a place of permanence within rental circles, you would struggle to find more reliable tenants.
MOB’s are mostly situated in highly sought-after centralized locations, downtown areas or adjacent to other medical centers or hospitals, but increasingly the demand is being created in the suburbs where they are convenient and accessible. If you need Dialysis 4 times a week you would prefer a local facility near your home than to travel to the hospital downtown.
According to the US Centre for Disease Control, people under the age of 64, tend to average 3 doctors visit per year; whereas people over the age of 65, average nearly 6 visits per year. Older people tend to have more doctors and specialists they need to visit. It’s not uncommon for a retiree to see 3 or 4 doctors in a day, or week, making convenience important.
Specialised healthcare facilities fulfil future needs
Long-term trends in the global healthcare sector ensure that investments in medical office buildings (MOBs) will continue to deliver stable returns, underpinned by long leases, high credit and even blue chip tenants.
There are four major trends in healthcare driving this trend where specialist medical service providers operate independently of hospitals.
The first of these is that massive disruption is occurring in the healthcare industry, as it moves from “sick care” to “health care”. Traditionally, you wait until you have a health problem and then you seek out treatment for the illness, which is reactive. Increasingly, the industry is moving towards preventing disease from developing and creating a health problem in the first place.
The move from reactive to predictive care is driven by massive investment in the US in research and development. Much of this investment has focused on wearable devices, such as Fitbit’s and hearing aids, with sensors that download an individual’s vital signals and transmits them to his or her insurance company. Associated with that are ongoing advances in artificial intelligence, which enable healthcare providers to predict what will happen to an individual’s health, based on the information available.
A second fundamental change is in genome sequencing and DNA coding. At the Longevity Institute in the US, individuals can have their genome sequencing analysed, as well as a radiology scan and various pathology tests. This can provide your doctors with a vast amount of information not only about your current state of health and medical history, but of your genetic make-up and the probability of experiencing disease in the future. Remedial action can be taken earlier extending the length and quality of life.
A third trend, is that in future diagnosis will be done by technology, and the function of doctors will be to treat and manage the patient. Pathology facilities for example have equipment that reduces the need for extensive lab work and produces a result immediately. This reduces the patients need to occupy a hospital bed for observation while waiting for results from the laboratory. Operations are done using laparoscopy’s and again the patient can be sent home same day without the extended hospital stay for recovery.
A fourth trend has become more prominent this year: the world has become acutely aware of the danger of infections. Even before Covid-19, infections, including those picked up in hospitals, have become a growing problem in treatment.
As a result, patients are increasingly avoiding “blood and bandages” facilities and preferring modern, state of the art facilities with independent practitioners that operate from these buildings. These are the facilities that are referred to as Medical Office Buildings, or MOB.
The statistics on outpatient care in the US bear this out. In 2006-08 hospital admissions were 120 per 1,000 patients. They are now 105 per 1,000, while outpatient admissions are 125 per 1,000. Outpatients admissions are already outnumbering inpatients.
This reflects the massive switch from the current delivery system, focused on surgery or clinical treatment of the disease, to one of specialised facilities where the patient has a more personal and holistic experience.
It is for this reason that there has been a radical swing in the total investment into medical real estate in the US, 39% is now in directed at MOBs and only 31% is being invested in hospital buildings.
The foundation of investment today is diversification and MOBs are different from other types of property investment because healthcare is fundamentally a very stable industry. Even if treatments and technology change, demand will remain resilient.
And this has been further reinforced since the economic upheavals that followed the outbreak of Covid-19, as medical office buildings (MOBs) have been attracting even more investor interest. According to US real estate management firm JLL, sales of MOBs in the US in the first half of 2020 were 10% higher than in the first half of 2019, at $5.5 billion, and there was substantial buying activity from institutional managers and private equity firms.
“Second half activity is expected to be even stronger, based on new listings in the market and a significant uptick in buyer interest, as closed transactions provide the pricing discovery that many investors seek,” JLL wrote in its September “Medical Office Perspectives”.
In summary, the healthcare space is changing at an accelerated pace, driven mostly by the advancement of technology, the growing ageing population across the world and in particular the USA, and the demand by communities for a more patient centric care delivery model.
OrbVest is a real estate company hyper focussed on finding these stable, income producing medical office buildings that will be worth more in the next decade, so investors can participate in this exciting sector. To find out more on our current medical investment opportunities visit www.orbvest.com or ……?