Latest Report on Medical Office Trends Sends a Message of Hope

In April, commercial real estate group CBRE released its report on U.S. Medical Office Trends for 2021. It offers news of a swifter recovery than market averages for those invested in the sector.

Health Care Employment Growth Will Resume

Health care jobs weren’t shielded during the pandemic, but losses in the sector were significantly less than in other areas—6.4 percent versus the 11.2 percent average. And it’s recovering quicker than average, too.

By Q4 2020, it was down just 1.5 percent year-over-year versus the 6 percent decline in total U.S. employment. Historically, health job growth has exceeded averages, and CBRE expects this trend to continue for the next five years.

Backlog of Medical Procedures Will Support a Sector Rebound

An estimated 41 percent of patients delayed medical care due to COVID-19 concerns. With the virus potentially coming under control in 2021, the backlog of elective procedures and routine visits will support the recovery of the sector.

Telehealth Won’t Significantly Reduce Demand for Medical Office Space

Telehealth will continue to cater to some of this need, but it’s anticipated to be negligible. Almost a third of providers never made the switch to telecare even at the height of the pandemic. And most of the rest reverted to minimal use after the virus’s initial surge—health care is just better handled in-person.

Telehealth may even lead to more in-person consultations if it facilitates greater patient interaction with rural patients, for example. And even if in-person consultations do decline, office layout will need to change to comply with social distancing requirements. It’s unlikely square footage will reduce.

Remote Work May Affect Administration Services

Administrative workers may be more suited to remote work than their colleagues who deal directly with patients. CBRE estimates that continued work-from-home arrangements could impact the health care sector’s demand for conventional office space by as much as 15 percent. But it also suggests it would be premature to take a call on this before there is a widespread return to the office.

Hospital Campuses Will Diversify

As technological advantages mean more procedures can happen off-campus and self-driving cars and ridesharing services call on-site parking into question, hospitals will use their space differently. In high-cost metros, this could entail affordable housing for staff burdened with high commuting costs due to rising home prices.

Health Care Will Decentralize

Provision of care will follow patients’ moves to the suburbs. Even before the coronavirus, remote work possibilities facilitated a migration away from urban centers. The pandemic increased this flight from the cities, and so will the millennials when they become homeowners.

Patients are going to seek health care close to their new homes. And new legislation and regulations supporting value-based care will also likely lead to a focus on preventive care in lower-cost facilities.

The Shift to the Sun Belt and Lower Cost Areas Will Accelerate

Patients won’t be the only ones moving to the suburbs. High-cost markets like New York and San Francisco have lost popularity during the pandemic. Many companies have forsaken their urban head offices for more affordable locations in Texas and Florida or given them up for a more distributed structure. Their workers will move with them and require health care where they go.

Investor Demand for Medical Office Space Remains Strong and Strengthening

In 2020, the drop in medical office property investment volume was 12.7 percent—the lowest of any major property type. This resilience follows the pattern established during the Global Financial Crisis of 2008 when sales of medical office space returned to their 2006 levels before any other sector. And it holds on price too, not merely volume of sales.

Combined with the uncertainty of conventional office space at this time, medical office space’s resilience has led to net acquisitions of medical office buildings by institutional investors reaching a record in 2020. It has been one of the most sought-after property types in 2021, and PwC and ULI listed it among their “Expected Best Bets in 2021.”

Providers Will Consolidate

Hospitals are under financial stress as a result of the pandemic. Close to the end of last year, operating margins were down by 5.1 percentage points year-over-year (excluding CARES funding). They will need to reevaluate their real estate to make cash flows work, even for those newly consolidated. Divestment will be an option, as well buybacks of currently leased space, depending on their needs.

In Summary

While the medical office sector wasn’t shielded from impact by the pandemic, it escaped the worst of it. Following the trend established in the Global Financial Crisis, the sector remained resilient and is recovering fast—in large part because of opportunities presented by the pandemic, such as procedure backlogs.

Telehealth and remote work are likely to have negligible effects on demand for medical office space. But campuses will diversify, and care will follow patients’ migration to the suburbs and Sun Belt areas.