2014 U.S. Economic and Medical Office Market Overview and Outlook November, 2014
Economic & Demographic Overview
U.S. GDP Growth and Health Care Spending Trends GDP Health Care Expenditures Annualized Quarterly Percent Change 10% 5% 0% -5% -10% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014* * Through 3Q Sources: Marcus & Millichap Research Services, BEA
Quarterly Employment Steady Full Recovery of Jobs Lost in Recession Quarterly Job Growth (Millions) 0.9 0.0-0.9-1.8-2.7 Year-to-Date Job Growth**: 2.3 Million -8.7 Million +8.2 Million +10.0 Million** 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014* * Through 3Q ** Through October 2014 Sources: Marcus & Millichap Research Services, BLS
Total Employment Growth vs. Healthcare Employment Growth 6% Total Employment Healthcare Y-O-Y Percent Change 3% 0% -3% -6% 1991 1992 1993 * Through October Sources: Marcus & Millichap Research Services, BLS Job Growth Since 2010 Trough* Health Care: +1,557,000 Total Employment: +10,025,000 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
U.S. Employment Gains Have Been Broad Y-O-Y Sector Change Through October 2014 U.S. Employment Sectors Absolute Change % Change Prof. & Business Services 657,000 3.5% Trade, Transport & Utilities 532,000 2.0% Leisure & Hospitality 380,000 2.6% Health Services 348,000 1.9% Construction 231,000 3.9% Manufacturing 170,000 1.4% Financial Activities 85,000 1.1% Educational Services 80,000 2.4% Government 60,000 0.3% Natural Resources & Mining 47,000 5.3% Other Services 43,000 0.8% Information 10,000 0.4% Net Change 2,643,000 1.9% Sources: Marcus && Millichap Research Services, BLS BLS
65+ Age Cohort Growth Driving Healthcare Spending 65+ Year Old Population (Mil.) 100 75 50 25 0 U.S. Population 65+ Years Old Total Growth 2010-2040*: 42.5 Million Total Growth 2014-2018*: 8.1 Million 1990 1995 2000 67% 2005 2010 2015* 2020* 2025* 2030* 2035* 2040* 65+ 55-64 45-54 35-44 25-34 < 25 years * Forecast Sources: Marcus & Millichap Research Services, U.S. Census Bureau, BLS Average Annual Per Capita Spending $841 $2,094 $2,762 $3,411 $4,048 $4,769 65+ 5-Year Total Healthcare Expenditure Growth: $5.8 Billion $0 $1,500 $3,000 $4,500 $6,000 Average Annual Per Capita Spending
Number of Insured in United States Without ACA After ACA 280 Number of Insured (Mil.) 260 240 220 67% 200 2014* 2015* 2016* 2017* 2018* 2019* 2020* 2021* 2022* 2023* 2024* * Forecast Sources: Marcus & Millichap Research Services, Congressional Budget Office
Economic & Demographic Overview
Changing Medical Sector Industry Consolidation
Medical School Enrollment 90 Number of Enrollees (000s) 80 70 60 50 04 05 06 07 08 09 10 11 12 13 Sources: Marcus & Millichap Research Services, Association of American Medical Colleges
Demand For Physicians Exceeds Supply 1.0 Physician Supply Physician Demand Number of Physicians (Millions) 0.9 0.8 0.7 0.6 2020: Shortage of 91,500 Physicians 2008 2010 2012 2014* 2016* 2018* 2020* 2022* 2024* Sources: Marcus & Millichap Research Services, AAMC Workforce Studies
Age Distribution of Office-Based Physicians 100% 9% 11% 11% 13% 14% 13% Percent of Total 75% 50% 20% 35% 24% 35% 30% 32% 29% 32% 32% 30% 28% 31% 65+ 55-64 45-54 35-44 25% 28% Under 35 27% 25% 23% 23% 23% 0% 8% 3% 3% 3% 3% 3% 2007 2008 2009 2010 2011 2012 Sources: Marcus & Millichap Research Services, CDC
Physician Ownership of Practice Declines as Industry Consolidates 2007/2008 2012 Private Practice: 61% Private Practice: 53% Percent of Total Physician Recruitment by Hospitals: 2004: 11% 2013: 64% Sources: Marcus & Millichap Research Services, American Medical Association, AMN Healthcare
Total Number of Hospitals Acquired 400 Total Number of Acquisitions 300 200 100 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Sources: Marcus & Millichap Research Services, Levin Associates
Number of Retail Clinics Growing Rapidly Total Number of Retail Clinics (000s) 3.0 2.5 2.0 1.5 1.0 1,418 Usual Place of Health Care Clinic: 21% Doctor s Office: 75% 1,743 Hospital: 3% Other: 1% 2,243 2,868 Retail Clinics Will Fulfill 10.8 Million Visits in 2015 2012 2013 2014* 2015* * Forecast Sources: Marcus & Millichap Research Services, Accenture, CDC
Changing Medical Sector Industry Consolidation
Medical Office Property Performance Overview and Outlook
Medical Office Supply and Demand Trends Completions Vacancy 32 12% Completions (Mil. of SqFt.) 24 16 8 11% 10% 9% Average Vacancy Rate 0 08 09 10 11 12 13 14* 15* 8% * Forecast Sources: Marcus & Millichap Research Services, CoStar Group, Inc.
National Medical Office Rank by Metro 3Q 2014 Vacancy Rate Top 10 Metros 3Q 2014 Vacancy Y-O-Y Bps Change San Fancisco 2.2% -110 Boston 4.8% -10 San Jose 5.2% -40 Columbus 6.4% -150 Portland 6.6% -40 Seattle 6.8% -20 Milwaukee 7.0% -30 Denver 7.2% -100 Miami 7.2% -140 Minneapolis 7.3% -30 U.S. Average 9.7% -10 Bottom 10 Metros 3Q 2014 Vacancy Y-O-Y Bps Change Phoenix 19.8% -70 Las Vegas 18.5% -320 Northern NJ 16.6% -10 Detroit 16.0% 140 San Antonio 14.6% 90 Palm Beach 14.4% -20 Chicago 13.3% -150 Atlanta 12.9% -120 Dallas-Ft. Worth 12.6% 20 Cincinnati 12.3% -40 U.S. Average 9.7% -10 Sources: Marcus & Millichap Research Services, CoStar Group, Inc.
Medical Office Net Absorption by Vintage Demand Concentrated Among Newer Properties 6 Pre-2009 2009+ Net Absorption (Mil. of SqFt.) 4 2 0-2 2009 1Q 2009 3Q 2010 1Q 2010 3Q 2011 1Q 2011 3Q 2012 1Q 2012 3Q 2013 1Q 2013 3Q 2014 1Q 2014 3Q Sources: Marcus & Millichap Research Services, CoStar Group, Inc.
U.S. Medical Office Rent Growth Trends 8% Medical Office Total Office Y-O-Y Percent Change 4% 0% -4% -8% 2008 2009 2010 2011 2012 2013 2014* * Through 3Q Sources: Marcus & Millichap Research Services, CoStar Group, Inc.
Medical Office Property Performance Overview and Outlook
Medical Office Investment Trends
U.S. Medical Office Investment Trends Transaction Activity Number of Deals 800 600 400 200 6.9% 7.7% 9.9% 8.8% 9.2% 9.1% 9.4% Percent of Total Office Transactions 9.6% 10.1% 0 06 07 08 09 10 11 12 13 14* * Trailing 12-months through 3Q Includes sales $1 million and greater Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics
U.S. Medical Office Buyer Composition Percent of Total Dollar Volume 100% 75% 50% 25% 9% 9% 2% 12% 34% 21% 48% 44% 14% 2% 18% 54% 7% 41% 41% Institutional Foreign Public Listed/REITs Private User/Other 0% 10% 12% 12% 11% 2011 2012 2013 2014* * YTD through October 29 Excludes entity-level transactions Includes sales $2.5 million and greater Sources: Marcus & Millichap Research Services, Real Capital Analytics
U.S. Medical Office Price and Cap Rate Trends $220 Average Price Cap Rates 9% Average Price per Sq. Ft. $195 $170 $145 8% 7% 6% Average Cap Rate $120 5% 2007 2008 2009 2010 2011 2012 * Preliminary estimate through 3Q Includes sales $1 million and greater Sources: Marcus & Millichap Research Services, Real Capital Analytics, CoStar Group, Inc. 2013 2014*
Medical Office Cap Rate Trends Average Cap Rates vs. 10-Year Treasury Medical Office Cap Rate 10-Year Treasury Rate 16% Average Rate 12% 8% 4% 0% 440 bps 150 bps 10-Yr Treasury Long-Term Avg. 1990 1991 1992 1993 1994 1995 1996 560 bps 590 bps 300 bps 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 * Through November 5 Includes sales $1,000,000 and greater Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics Cap Rate Long-Term Avg. 500 bps 610 bps 510 bps 2008 2009 2010 2011 2012 2013 2014*
Medical Office Investment Trends
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2014 U.S. Economic and Medical Office Market Overview and Outlook November, 2014