Challenges Create Opportunities, Says MOB Investor

December 23, 2024

Executive Insights Investment Medical Office National

Alliance CGC's founder & CEO on promising investments in health-care real estate.

For Reinberg, accessibility in health-care real estate is not just a buzzword. Image courtesy of Alliance CGC

Medical outpatient facilities continue to be investor darlings. The sector is seeing long-term tenancy and high occupancy, as opposed to traditional office and other asset types that have been struggling to return to prepandemic performance.

Despite a lower transaction volume this year due to the Fed’s successive interest rate hikes, industry professionals expect medical office deals to pick up now that lending conditions have started to loosen.

Alliance CGC is among the investment companies with a strong interest in health-care real estate. The firm has nearly 20 years of experience in dealing with this asset type and a current portfolio worth north of $500 million. Since 2013, its investments have achieved an average total return of 200 percent.

We asked Founder & CEO Ben Reinberg to talk about the factors currently shaping medical office space demand, the strategic role of accessibility and how challenges can be turned into opportunities.

Medical office space demand is transforming. Which drivers are now key?

Reinberg: The demand for medical office buildings is being reshaped by several key trends transforming the health-care and real estate landscapes.

One significant driver is the decentralization of health care, as patients increasingly seek outpatient care in accessible, retail-style locations rather than navigating large hospital campuses. This shift has given rise to the concept of medtail—medical in retail spaces—where health-care services integrate seamlessly into retail environments.

Exterior of medical office building in Libertyville, Ill. — Alliance CGC acquired this medical office building in Libertyville, Ill., from a distressed seller in 2013 and sold it in 2017. *Image courtesy of Alliance CGC*

Another significant factor is the rise of telemedicine and hybrid-care models, which demand MOBs with flexible, modern designs. At Alliance, we leverage data and market research to identify areas where health-care providers need adaptable spaces to accommodate these changes and serve patients effectively.

Finally, the aging population, often referred to as the gray tsunami, continues to be a critical driver of demand. Our portfolio is positioned strategically to meet this long-term demographic shift, ensuring our investments align with the growing need for health-care services.

Speaking of which, how do you anticipate the gray tsunami to impact the MOB sector in the long run?

Reinberg: The gray tsunami is one of the most significant trends shaping our investment strategy. As the population over 65 grows, the need for specialized health-care facilities will only increase. This isn’t just speculation, we already see it in our portfolio performance. Properties catering to geriatrics, diagnostics and chronic disease management consistently attract high-quality tenants and deliver stable returns.

In the long run, this demographic shift will reshape health-care real estate. MOBs located in suburban and secondary markets, where these populations are growing, will become even more valuable.

Let’s go back to accessibility. How important is it for your investment strategy?

Reinberg: Accessibility is at the heart of every project I take on. For me, it’s not just about the physical location, it’s about enhancing the patient experience and ensuring tenant success. When we invest in a MOB, we evaluate every detail: How close is it to the population it serves? Is parking convenient and ample? Is public transportation available? How accessible is the facility from residential areas or major highways? These factors are critical because they directly influence tenant retention and patient satisfaction.

Exterior of medical office building in Frankfort, Ill. — Alliance leased this medical office building in Frankfort, Ill. to a credit-rated hospital system from Chicago and then sold it in 2017. *Image courtesy of Alliance CGC*

We’ve repeatedly seen how accessible properties drive success. For instance, when we developed a property near a growing suburban community, its strategic location became a significant selling point for health-care providers, resulting in a rapid lease-up. Well-located MOBs attract high-quality tenants which stay longer, ensuring consistent cash flow and strong investment returns.

Accessibility is not just a buzzword. It’s a proven strategy that creates value for patients, tenants and investors alike.

How about last-mile delivery? Is this a thing in health-care real estate?

Reinberg: With the rise of telehealth and home care, there’s a growing need to ensure that medical supplies, prescriptions and mobile care units can reach patients quickly. This trend directly impacts the real estate landscape as it shifts the priorities of health-care providers when selecting locations for their services.

But one major challenge is that the infrastructure to support these services often lags behind demand. That’s where Alliance CGC sees opportunity. Investing in MOBs located strategically near residential areas or key distribution hubs, we help health-care providers bridge that last mile to patients. For instance, we’re exploring properties that can accommodate specialized logistics needs, such as cold storage for pharmaceuticals.

READ ALSO: Healthy Medical Office Spaces

Which investment strategies are you pursuing now in this sector?

Reinberg: One of the strategies I’m particularly excited about is adaptive reuse. We see opportunities to convert underperforming office properties into high-performing MOBs. It’s a way to bring health care closer to communities while adding value to our portfolio.

We also focus on niche specialties like outpatient surgery centers and diagnostic labs. These facilities are in high demand and often require specific buildouts, which allows us to leverage our expertise and deliver tailored spaces.

And which U.S. markets are next on your list for portfolio expansion?

Reinberg: We’re targeting markets where the demographic and economic trends are undeniable. States like Texas, Florida and Arizona are prime examples. These areas have a combination of population growth, a high percentage of retirees, and pro-business environments that make them ideal for MOB investments.

For instance, in Texas, we’ve identified suburban markets where health-care providers are expanding aggressively to serve growing communities. Florida’s aging population creates a consistent demand for specialty care, while Arizona offers both demographic growth and affordability compared to neighboring states.

How do you think the medical outpatient sector will perform in the upcoming year?

Reinberg: Higher interest rates have undeniably affected the market, but I’ve always believed that challenges create opportunities. We’ve leveraged our strong cash position to acquire properties outright, targeting assets at favorable prices that others couldn’t pursue due to high borrowing costs. This strategy has allowed us to navigate these headwinds effectively and our long-standing track record of delivering a 28 percent internal rate of return has built deep trust with our investors.

With the Fed signaling stabilization and implementing three rate cuts, I anticipate a more favorable borrowing environment in the coming year. This shift should renew the MOB activity, unlocking opportunities for well-capitalized investors to act strategically. Additionally, over-leveraged owners facing financial pressures are likely to sell, creating more opportunities for acquisitions.