Medical Office Market: Outlook Healthy.

• Author: Hanlon, Peter
• Position: MEDICAL OFFICE

Healthcare has been a political "football" for over seven years with no conclusion in sight. The threat of repeal of the Affordable Care Act (ACA) did not become a reality in 2017, but some changes were made with the possibility of further modifications in the future. The result is renewed uncertainty in reimbursement to medical providers, both large and small. Smaller, independent medical providers remain indecisive, if not reluctant, to execute on new, more expensive leases. Nevertheless, investment demand for quality medical office product remains robust.

Cushman & Wakefield's Salt Lake County Medical Office study for the second quarter of 2017 reflects the strength of this office sector. Asking lease rates continued to rise as vacancy declined over the past two years, with overall asking rates of $15.64 Triple Net and vacancy at 7.70% (as of June 30, 2017). Net absorption in the four quarters ending June 2017 was over 100,000 square feet. This is a particularly strong absorption figure that was dominated by the 63,000-square-foot lease transaction at the PRA Health Sciences/Evergreen office building located across from St. Mark's Hospital.

On-campus medical-office properties command a premium in the market. Asking lease rates for these properties were, on average, $4.83 per square foot higher than asking lease rates for off-campus properties. Similarly, during 2017, average vacancy rates at on-campus properties were 7.1% compared to 8.2% for off-campus properties. These factors reflect the historic demand by both physicians and hospitals to have healthcare providers in close proximity to each other.

Salt Lake County Lease Rates and Vacancy On-Campus AVG. ASKING LEASE RATE (PSF) $18.46 AVERAGE VACANCY 7.1% Off-Campus AVG. ASKING LEASE RATE (PSF) $13.60 AVERAGE VACANCY 8.2% The national investment market for healthcare-related properties remained robust in 2017.

According to Real Capital Analytics, sales of medical properties were $13.9 billion for the four quarters ending September 30, 2017. This is an increase of 33% from the previous four quarters, due in part to a large disposition of properties by Duke Realty, one of the largest medical office investors in the country. Cap rates remained steady from 2016 to 2017, at an average capitalization rate of 6.7%.

Medical Office Building Sales Statistics U.S. AVERAGE SALES PRICE PER SF. $277 AVERAGE CAPITALIZATION RATE 6.70% Salt Lake County AVERAGE SALES PRICE PER SF. $237 AVERAGE...