Healthcare
Capital Markets
May 2021
Medical office investment performance attracts growing participation of institutional investors
Key points:
  • The medical office sector has exhibited growing acceptance and increased participation from institutional investors – a leading indicator of sector liquidity – and a key ingredient for driving pricing momentum. During the past three years, institutional investors nearly doubled their share of new investment in medical office, from 11% to over 21% of all sales, dwarfing the growth rate in other sought-after sectors such as life sciences. The 21% share of institutional investment in medical office lags behind office (40%) and industrial (34%), suggesting that medical office has plenty of room to grow. With continued participation by institutional investors, liquidity increases which supports pricing growth and cap rate compression. Higher property values in turn propels supply and transaction volumes. Recent high levels of medical office sales is solid evidence that owners are seeking to capitalize on increased valuations. 
  • The investment thesis for medical office has been ratified throughout the pandemic with the sector’s durable occupancy and rental rates and strong rent collection. The broader commercial real estate sector has also been validated throughout the economic shock of the past year since commercial real estate, as an asset class, offers higher-yielding options compared to private and public market investment alternatives. Real estate’s strong performance is a key reason behind the record $222 billion in dry powder available in 2021 for investment.
  • Historically, the opportunity for yield has divided traditional and alternative sectors, with more durability and resilience typically ascribed to core property types such as office. However, as returns for core property types have compressed, alternatives have moved to center stage. Indeed, medical office and life sciences have outperformed traditional real estate sectors by a wide margin in recent quarters. 
  • Medical office offers scale not found in other desirable alternatives sectors which share common attributes of mission critical and/or strong demand-driven occupancy. At 1.5 billion square feet of U.S. inventory, medical office exceeds other high-performing and in-favor segments like life sciences (147 million square feet), data centers (46.4 million square feet) and cold storage (250 million square feet). The size of medical office inventory along with swelling institutional participation bodes well for sustained total return performance. 
 
Recent activity
New Listing - Investment Sale
Legacy Oaks Medical Office
227,657 s.f.
San Antonio, TX
New Listing - Investment Sale
M Health Fairview Midway Clinic  
22,721 s.f.
St. Paul, MN
Closed - Investment Sale
Cornwall Medical Pavilion 
95,243 s.f.
Leesburg, VA (DC Metro)
Closed - Debt Placement
Nobis College Park Rehabilitation Hospital
47,750 s.f.
Overland Park, KS
 
Closed - Debt Placement
Commonwealth Building
40,303 s.f.
Richmond, VA
Closed - Investment Sale
Westover Hills MOB
29,375 s.f.
San Antonio, TX
 
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