STEADY AND SAFE: UTAH'S LONG-TERM DEMOGRAPHIC AND ECONOMIC PROJECTIONS SUMMARY.

Author:Hanlon, Pater
Position:MEDICAL OFFICE
 
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The drama associated with the Affordable Care Act ("ACA") in 2017 was not evident in 2018. However, reimbursement to providers and coverage for several segments of the population remain uncertain heading into 2019. Further, some high-profile players in the U.S. economy announced yet to be determined entry into the healthcare market. These "disruptions" fuel uncertainty that impacts real estate decisions by large and small traditional providers. Nevertheless, investment demand for quality medical office product in the U.S. remains steady.

Cushman & Wakefield's Salt Lake County medical office study for the second quarter of 2018 reflects the strength of this office sector. Overall, lease rates continued to rise as vacancy declined over the past year, with an average asking rate for off-campus and on-campus medical properties of $16.26 (triple net) and vacancy at 7.20% (as of June 30, 2018). Net absorption in the four quarters ending June 2018 was 12,895 square feet.

On-campus medical office properties command a premium in the market. Asking lease rates for these properties were, on average, $4.70 per square foot higher than asking lease rates for off-campus properties. Similarly, during 2018, average vacancy rates at on-campus properties were 7.0% compared to 7.3% for off-campus properties. These factors reflect the historic demand by both physicians and hospitals to have healthcare providers near each other.

SALT LAKE COUNTY LEASE RATES (TRIPLE NET) AND VACANCY On-Campus Avg. Asking Lease Rate (PSF) $19.03 Avg. Vacancy 7.0% Off-Campus Avg. Asking Lease Rate (PSF) $14.33 Avg. Vacancy 7.3% The national investment market for healthcare related properties remained robust in 2018. Per Real Capital Analytics, sales of medical properties in the U.S. were $8.5 billion for the four quarters ending September 30, 2018. This is a decrease of 16% from the previous four quarters. This decrease is due largely to the anomaly associated with the large portfolio sale of Duke Realty properties in 2017, not in decreased demand for medical investment properties. Even with this anomaly, the annual increase in medical office investment product has increased by an average of 11.7%, year-over-year, since 2014. Cap rates remained steady in 2018 with an average capitalization rate of 6.7%.

MEDICAL OFFICE BUILDING SALES STATISTICS U.S. Avg. Sales Price (PSF) $283 Avg. Capitalization Rate 6.4% Salt Lake County Avg. Sales Price per (PSF) N/A Avg. Capitalization Rate 6.4%...

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