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  • Krone Weidler

Smaller Metros Boast Higher Medical Office Occupancy

As healthcare real estate investors scour the market for opportunities, one trend is becoming abundantly clear: smaller metros are outperforming their larger counterparts when it comes to medical office building (MOB) occupancy.

According to the latest data from Revista, MOBs in the top 10 metro areas averaged 91.6% occupancy in the first quarter of 2024. While still healthy, this represents a 140 basis point deficit compared to the 93% occupancy rate seen across metros ranked 100-125 in size.

This gap is nothing new - smaller metros have consistently posted higher occupancy than primary markets since at least 2019. However, the spread has widened over the past two years as rising construction has put more competitive pressure on properties in major metros. Occupancy in the top 10 markets has fallen by 230 basis points since Q1 2022, while the smallest metros tracked have seen occupancy dip by just 60 bps over the same period.

Several structural factors are driving this outperformance by smaller markets:

  1. Fewer competing properties. Smaller metros tend to have a more limited stock of MOBs, supporting higher occupancy at existing properties. There is less risk of tenants jumping to a competing building.

  2. Stickier tenant base. Healthcare providers in smaller markets often have fewer relocation options and may be more inclined to renew leases rather than endure the disruption of a move. This tenant "stickiness" promotes stability.

  3. Insulated from supply growth. While new MOB completions have surged in major metros, construction activity remains more muted in secondary and tertiary markets. Many smaller metros have high barriers to entry that curtail speculative development.

  4. Steady demographic trends. While gateway markets have seen population growth slow or even reverse due to out-migration, many smaller metros are still recording steady gains that support demand for healthcare services. An influx of retirees, in particular, is boosting housing markets and healthcare spending across the Sunbelt and other lifestyle destinations.

For investors, understanding these geographic nuances is critical to identifying markets and assets that can deliver consistent cash flow. Smaller metros may provide unique opportunities to acquire well-leased MOBs at an attractive basis.

That said, the relative illiquidity of these markets is an important consideration. Assets in secondary and tertiary metros may take longer to sell or refinance, so investors should be prepared to hold for an extended period.

Investors should also carefully evaluate the tenant roster and renewal probability at each property, as well as the trajectory of key demand drivers such as population and job growth, to gauge an asset's long-term occupancy potential.

By taking a strategic approach to market and asset selection, healthcare real estate investors can build durable portfolios that tap into the fundamental strengths of MOBs in smaller metros.

Source: Revista 2024

Krone Weidler, Founder & Principal

Cadre Healthcare Realty Advisors

1095 SE 177th Place, Suite 404-M14

Summerfield, FL 34491

C: (813) 842-2365

O: (866) 355-3594

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