Category: AXSYS Capital Insights

By David Meggs, CEO, AXSYS Capital

In the world of investing, diversification is often hailed as a key strategy for managing risk and optimizing returns.  While traditional investment avenues such as stocks, bonds, and mutual funds have long been the go-to choices for diversifying a portfolio, there’s a growing trend towards exploring alternative investments.  One such avenue gaining traction among investors is medical office buildings (MOBs).  Investing in MOBs presents a compelling case for diversification, offering stability and resilience, particularly during stock market corrections.

Understanding Medical Office Buildings (MOBs)

Medical office buildings are commercial properties specifically designed to house medical practices, clinics, outpatient care centers and related healthcare facilities.  These buildings serve as essential infrastructure within the healthcare industry, providing spaces for doctors, specialists and other healthcare professionals to deliver on demand patient care services.

MOBs typically feature several advantages that make them attractive investment options:

1. Stability and Consistency: Healthcare services are considered essential, which means demand for medical office spaces tends to remain stable regardless of economic conditions. Similarly, we saw that medical offices remained opened during the pandemic. People continue to require medical care even during economic downturns, ensuring a consistent stream of tenants and rental income for MOB investors.

2. Long-Term Leases: Medical tenants often sign long-term leases, providing investors with predictable cash flows over extended periods of time. Additionally, healthcare providers tend to invest significantly in outfitting their spaces to meet specific regulatory and technological requirements, which significantly reduces tenant turnover rates.

3. Resilience to Technological Disruption: Unlike some sectors susceptible to technological disruption, such as retail, the healthcare industry is relatively insulated from rapid technological changes. While advancements in healthcare technology occur, the need for physical spaces for patient consultations, examinations and treatments remains essential and unchanged.

Hedging Against Stock Market Corrections

During stock market corrections or economic downturns, investors seek refuge in assets that demonstrate resilience and stability.  Here’s how investing in MOBs can serve as a smart shield against stock market volatility:

1. Defensive Asset Class: MOB investments are considered defensive assets due to their stable income streams and lower correlation with broader market movements. While stock prices may experience sharp declines during market corrections, the demand for healthcare services and, consequently, medical office spaces tends to remain robust.

2. Income Generation: MOBs provide a consistent source of rental income, which can act as a buffer against declines in stock market returns. Even if stock prices falter, the rental income from MOBs can help cushion the impact on an investor’s overall portfolio.

3. Portfolio Diversification: By allocating a portion of your investment portfolio to MOBs, you diversify your risk exposure across different asset classes. This diversification can help mitigate the overall volatility of your portfolio, reducing the impact of market downturns on your investment returns.

Considerations for Investing in MOBs

While investing in MOBs offers several benefits, it’s essential to conduct thorough due diligence and consider the following factors:

1. Location and Market Dynamics: Evaluate the location of the MOB, local demographics, and healthcare market dynamics. Investing in areas with growing populations and strong demand for healthcare services can enhance the long-term viability of the investment.

2. Tenant Quality and Lease Terms: Assess the creditworthiness of tenants and the terms of their leases. Long-term leases with reputable healthcare providers can provide greater stability and predictability in rental income.

3. Regulatory and Compliance Risks: Understand the regulatory environment governing healthcare facilities and ensure compliance with relevant regulations. Changes in healthcare policies or regulations could impact the operating environment for MOBs.

4. Property Management and Maintenance: Consider the expertise of property management teams responsible for maintaining the MOB. Well-maintained properties can attract high-quality tenants and ensure tenant satisfaction.

Diversifying a portion of your investment portfolio to include medical office buildings can serve as a prudent strategy for protecting yourself against stock market corrections. With their stability, long-term leases, and resilience to economic downturns, MOBs offer investors a defensive asset class that can complement traditional investments in stocks and bonds. By carefully evaluating opportunities in the healthcare real estate sector and incorporating MOBs into your investment strategy, you can enhance portfolio resilience and potentially achieve more stable, predictable returns over the long term.

By: David Meggs, Co-Founder & CEO, AXSYS Capital

In the ever-changing landscape of real estate investing, savvy investors are constantly on the lookout for recession-resistant opportunities.  One such resilient sector that has proven to withstand economic downturns is medical office buildings (MOBs).

As the demand for healthcare and outpatient services continues to rise, investing in these stable properties offers a recession-proof approach to fortifying your real estate portfolio—and is a great way to diversify your holdings outside of the stock market.  In this blog post, we’ll delve into the reasons behind the stability of MOB investments during economic downturns, and how investing in this niche offers several advantages to those who purchase MOB properties.

Growing Healthcare Demand:

Medical services are a fundamental necessity, irrespective of economic conditions.  During recessions, people may cut back on discretionary spending, but healthcare remains a non-negotiable expense.  The US’ aging population will only continue to drive the demand for medical services, ensuring a steady stream of tenants for medical office and ‘medtail’ buildings.

According to the Federal Agency CMS (Centers for Medicare & Medicaid Services), physician and clinical services spending is projected to grow at an average rate of 5.4% per year and reach $1.2 trillion by 2027.  Statista Market Insights projects the healthcare market expected to grow at stellar growth rate of 10.4% (CAGR 2023- 2027).

Furthermore, the 2020 census revealed that between 2022 and 2030, more than 20% (or the equivalent of 10,000 Baby Boomers per day) of the total U.S. population will reach the age of 65.

Stable Cash Flow:

Medical practitioners often sign long-term leases (typically 10 years or more), providing stability and predictable cash flow for MOB investors.  These leases typically have built-in rent escalations, which help protect against inflation and ensures that the income generated from the investment continues to grow over time.

Additionally, properties that are triple net leased (NNN), where the tenant agrees to pay the property taxes, building insurance and maintenance in addition to rent and utilities, have become popular investment vehicles for retail private investors over the past decade because they offer low-risk, steady income with the headaches of dealing with the day-to-day management of a property.

Defensive Nature of Healthcare Services:

The demand for medical services is defensive, meaning it is relatively insensitive to economic fluctuations.  People prioritize their health, and even in challenging economic times, they are unlikely to forego essential medical visits.  This ensures a consistent demand for medical office spaces, shielding investors from the volatility that other real estate sectors, especially traditional office buildings, may experience during a recession.

Government Stability and Regulation:

The healthcare industry is heavily regulated, with stringent requirements for medical facilities.  This regulation provides a level of stability to the sector, making it less susceptible to market fluctuations.  Government-backed healthcare programs and insurance further contribute to the reliability of medical office building investments.

Technological Advancements and Specialized Facilities:

Advances in medical technology have led to an increased need for specialized facilities, creating additional opportunities for MOB investors.  Medical office buildings equipped with state-of-the-art technology and specialized services are in high demand, making them recession-resistant due to their unique and essential offerings.

Location Stability:

Medical office buildings and ‘medtail’ properties (typically a small retail center occupied solely by medical and healthcare tenants) are often strategically located near hospitals and healthcare hubs.  These locations remain stable during economic downturns as they are integral to the provision of medical services.  Examples include companies that provide blood tests, cancer treatment or outpatient care.  Proximity to major healthcare facilities ensures a consistent flow of patients and tenants, reinforcing the recession-proof nature of these investments.

Adaptability and Resilience:

The healthcare industry has shown remarkable adaptability, as evidenced by the surge in telemedicine during the COVID-19 pandemic.  Medical office buildings can adapt to evolving healthcare trends, ensuring their relevance and resilience even in the face of unforeseen challenges.

In the realm of real estate investing, the pursuit of recession-proof opportunities is an ongoing quest for stability and long-term growth.  Medical office buildings stand out as a resilient choice, driven by the constant demand for healthcare services, stable cash flow, and the defensive nature of the healthcare sector. Investing in these facilities provides not only financial security but also contributes to the well-being of communities by supporting the essential services that medical professionals provide. As economic uncertainties loom, the prescription for a recession-proof real estate investment may very well be found in the steady heartbeat of medical office buildings.

AXSYS Capital has dedicated itself to seeking out what it considers to be the sweet spot of recession-proof investments, focusing on quality assets that are well-located, newly built and/or recently renovated MOB’s and Medtail centers in Midwestern states.  With roughly $60 million of AUM, AXSYS is deploying additional capital to invest in similar properties across the Midwestern states over the next 12 to 18 months, including Illinois, Missouri, Ohio and Wisconsin.   For more information, visit https://axsyscapital.com/