After mostly flying under the radar of major real estate investors, medical office property in the Washington area is starting to attract heightened investor interest.
The unique qualities of medical offices are part of their appeal. Although typical build-out costs for medical space are more expensive than traditional office space, medical offices typically command higher rents.
Owners of medical office space also benefit from a relatively stable tenant base. Since 2000, the average vacancy rate for medical office properties has been about 2.5 percent lower than that of the overall office market in the area.
Regional demographics also factor into the positive investor outlook for the medical office sector. Since 2010, the population of people aged 65 or more in the Washington area has grown by 110,000, or 19 percent. In comparison, the total population grew by 7 percent during the same period. Growth in the senior population is expected to continue to outpace that of the total population into the next decade. That, coupled with more people insured because of the Affordable Care Act, and the need for health-care services (and for buildings that house them) should contribute to greater demand for such space over the next few years.
Sales of medical office space in the local market virtually exploded since the beginning of 2013 to almost $680 million, more than the previous six years combined. That big increase was largely because of one notable deal in January 2014: Harrison Street Real Estate Capital’s purchase of five medical office buildings in Fairfax County in two separate transactions from Washington Real Estate Investment Trust for a combined price of $193.6 million, or $453 per square foot.
Responding to the increased demand, developers added 334,000 square feet of medical office space to the region’s inventory in 2013, and have another 285,000 square feet under construction so far this year.
Inova Health Care Services recently opened a 112,500 square-foot project near Inova Fair Oaks Hospital in Fairfax in March, while Lerner Enterprises put the finishing touches on Fallsgrove Plaza, a similar-size structure in Rockville, soon after. Other notable medical office projects currently underway include projects at the Holy Cross Germantown Hospital campus and Stone Springs Hospital Center in Loudoun.
Ethan Vaisman is a real estate economist with CoStar in Washington.