August 24, 2022

CBRE Investment Management Enters MOB Sector with Eye on National Footprint

Seeking further investment in recession-proof real estate, CBRE Investment Management has entered the medical office sector.

Its managed fund announced this week that it acquired a four-building medical office portfolio totaling 282,683 square feet in Orange County, Calif., through a joint venture with Healthcare Realty Trust.

Larissa Belova, portfolio manager, CBRE Investment Management, said in prepared remarks that, similar to the life science sector, “the medical office sector is attractive because the aging population coupled with the world pandemic have increased spending on healthcare.

“Our strategy focuses on assets located within or adjacent to thriving hospital systems that create ecosystems that benefit doctors and their patients.”

Sondra Wenger, head of Americas commercial operator division, CBRE Investment Management, said in prepared remarks that medical office has high barriers to entry due to the increasing complexity of the assets, resulting in an undersupply of state-of-the-art assets.

“Tenant retention rates tend to be higher because of the cost of tenant improvements and the need for a recognized location,” Wenger said. “This acquisition gave us an opportunity to gain immediate scale of historically strong-performing medical office building assets in a top cluster within the healthcare sector, and we are looking to increase our investment nationally in this sector that has performed well through market cycles.”

Medical Assets Expected to Outperform Office Market

Medical office properties have proven relatively resilient with vacancies averaging about 2% lower than traditional offices as the work of medical practitioners often requires an in-office presence, according to a CBRE release. “For these reasons, medical office assets are expected to outperform the office market overall,” the company said.

Brett Buchwald, Vice President at SK Commercial Realty in Atlanta, tells GlobeSt.com that acquiring on-campus or campus adjacent medical office facilities is an excellent strategy to bolster the stability and maintain a portfolio’s value.

“There is always demand for medical office tenants to be near hospitals,” Buchwald said. “During the pandemic, very few medical office tenants requested rental abatements or missed rental payments. So, these kinds of acquisitions are viewed as extremely recession resistant.”

Toby Scrivner, Senior Vice President at Northmarq, tells GlobeSt.com that campus-adjacent medical properties provide investors with two fundamentally valuable characteristics.

“First, these are irreplaceable real estate assets,” Scrivner said. “Second, they provide a source of future tenant prospects. The available supply of existing surplus medical real estate is very limited though. Prudent investors are currently searching for properties that can be acquired for an attractive basis relative to new construction.”

Acquired From Largest Healthcare Trust

The assets CBRE Investment Management acquired were part of the Healthcare Trust of America portfolio, which has merged with Healthcare Realty Trust to form the largest medical office building owner in the United States.

The portfolio includes Mission Medical Center Buildings 1-3 and Mission Medical Center Tower on the campus of a leading acute care hospital in affluent Mission Viejo.

Mitch Creem, principal, GreenRock, tells GlobeSt.com that many hospitals throughout the US own medical office buildings on or near their campuses.

“Hospital-owned MOBs are aging and often in need of major renovations to keep and attract physicians and patients,” Green said. “Partnering with real estate investment trusts and funds to infuse new capital into needed upgrades makes a lot of sense, especially during these times of declining hospital profits and cash flows.

“Additionally, these MOBs are good investments due to the ever-present trends of our growing aged population and a shift of medical care towards lower-cost outpatient settings. Moreover, the medical office fits the bill for physicians and patients to be closer to higher levels of care when needed.”