What Can You Expect from the Medical Office Market in 2019?

NAI James E. Hanson gathered some of our leading brokers to provide insights on what the market holds for a variety of asset classes as well as key factors that will impact our industry throughout 2019.

Randy Horning, Associate Vice President, the Medical Office Market

Anyone driving through New Jersey is aware of the continued spread of large healthcare systems, a trend that shows no sign of abating in 2019. With often-overlapping service areas, these systems’ demand for Class-A medical office space and a substantial development lag will create an elevated pricing situation throughout the year.

Along with elevated pricing, much of the state’s current supply is spoken for or functionally obsolete. As systems look to grow their footprint in a low supply situation, there will continue to be significant opportunity in medical office ground-up development or redevelopment. High pricing and economic uncertainty will also provide medical office owners with the opportunity to pursue sale-leasebacks. The sale-leaseback provides owners with the opportunity to recognize the tremendous value of their assets while securing a long-term lease and redeploying capital into their businesses to draw customers in a more competitive marketplace.

Once a darling of medical office development, the explosion of urgent care facilities is in the midst of a slowdown. However, a new trend has supplanted the urgent care model. The “retailization” of healthcare has moved the delivery of care away from hospitals and medical centers into retail centers and malls. This trend presents opportunities for both retail owners and healthcare systems as it helps retail owners stabilize struggling retail centers while allowing healthcare systems to easily reach their patients in the same places that they perform their daily errands.

The optimism surrounding the medical office market does not mean that it is immune from macroeconomic forces. Owners and tenants will also need to keep a close eye on interest rates as the expense of buildouts will be highly dependent on borrowing costs and may price smaller medical office tenants out of the market. In addition to increases in rates, possible modifications to federal and state healthcare policy can also have a deep impact on the market.

Factoring in each of these points, it is easy to see that the medical office market will be a strong, yet complex, market throughout 2019.