Chapter 7

Medical Office Development

U.S. Healthcare & Life Sciences Capital Markets

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Question 34

For developers, where do you expect health system development RFP activity to be in 2023 compared to a year ago?

Two thirds (65%) of respondents anticipate that development RFP activity will remain unchanged or increase in 2023, down from 93% last year. Half of healthcare REITs (50%) expect that RFP activity will increase in 2023 while private capital (55%) and institutional investors (60%) indicate they believe. that RFP activity will drop.

Construction projects in the healthcare industry are facing the same challenges as the rest of the commercial real estate (increased cost of capital, concerns over construction costs, etc.) but are buoyed by sustained demand and a growing consolidation to investment-grade health systems. The rising operating costs—including increased expenses for personnel and materials—in health systems have had a significant impact. As a result, many need to allocate additional capital to meet their operational requirements. To address this, health systems are increasingly relying on collaboration with third-party developers to fulfill their real estate needs.

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Source: CBRE U.S. Healthcare & Life Sciences Capital Markets Investor & Developer Survey Results 2023.

Question 35

For developers, what is the minimum lease constant you would consider for a healthcare development opportunity meeting your highest standards?

For 2023, developers indicate they would be more comfortable with a higher lease constant compared to years prior. This year’s responses trend toward the 7.00% - 8.99% range, with 84% indicating a lease constant of 7.00% or higher, compared to 2022, when only 25% of developers required a lease constant higher than a 7.00%.

Figure 42: Minimum Development Yield

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Source: CBRE U.S. Healthcare & Life Sciences Capital Markets Investor & Developer Survey Results 2023.

Question 36

For developers, what is the minimum pre-leased threshold percentage you (or your lender) would consider for a medical office development meeting your highest standards?

Compared to last year’s survey, nearly double the developers (62%) state that medical office developments must be 60% or more preleased for projects to meet their strictest development criteria. Down from 64% in 2022, 38% of developers will proceed with less than 60% or less of preleasing in the building as developers are subject to stringent lender underwriting standards, as well as defensive against potential yield erosion via increased cost of capital and potential for slower absorption.

Figure 43: Minimum Pre-leasing Threshold

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Source: CBRE U.S. Healthcare & Life Sciences Capital Markets Investor & Developer Survey Results 2023.

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