Election years have historically been a period of heightened uncertainty in financial markets. Investors often hold their breath as political debates over tax policies, regulatory changes, and government spending stir volatility. The 2024 election cycle is no exception, with market swings driven by speculation and uncertainty surrounding the outcome. As the political landscape shifts, investors across the real estate sector are grappling with rising interest rates, tightening financial conditions, and concerns about asset valuations.
Despite this chaos, one sector remains remarkably stable: medical office buildings (MOBs). Bob Waun, co-founder of Physician Property Partners (PPP) and DIRT Realty, believes that while other real estate classes face significant risks, Prime Medical Office buildings continue to offer a safe haven for investors.
“Election years always bring chaos to the financial markets,” Waun says. “But once the dust settles, there’s typically more certainty, and that's when we see more stable markets. In the meantime, medical office buildings provide a level of safety that other real estate assets can't match. Healthcare doesn’t stop for elections.”
Election-Year Volatility: A Familiar Pattern
Historically, election years in the U.S. tend to introduce more volatility into the markets. According to a Goldman Sachsreport, in the year leading up to a presidential election, the S&P 500 has experienced higher-than-average volatility, with market swings often intensifying in the months just before Election Day. Investors tend to adopt a "wait and see" approach, delaying major decisions until there’s more clarity on the political landscape.
“Every four years, we see this same cycle of uncertainty and hesitancy in the market,” says Waun. “Investors are understandably cautious, but this also creates opportunities for smart investments in resilient sectors like medical office buildings.”
Post-election, markets tend to stabilize as the outcome brings clarity to fiscal and regulatory policies. This pattern has held true for decades, with the S&P 500 posting an average return of 7.1% in the year following an election, according to Fidelity Investments. As political uncertainty fades, the markets find footing, and investor confidence returns.
Cap Rates and Valuations: Challenges in 2023-24
In the meantime, rising Cap rates and the cost of capital are weighing on real estate valuations across the board, particularly in 2023 and 2024. As interest rates have risen sharply in response to the Federal Reserve’s fight against inflation, Cap rates for medical office buildings have followed suit. A report from CBRE shows that average Cap rates for MOBs increased to 6.9% in 2023, up from 6.2% the prior year, as the cost of borrowing surged.
This rise in Cap rates has led to a decline in property values for even stable assets like medical office buildings. With higher interest rates driving investor demand for greater yields, properties that once commanded premium valuations are now seeing price declines.
"A higher Cap rate means a lower property value—it's that simple," Waun explains. "But unlike traditional office or retail, the demand for medical office space remains strong, which helps mitigate some of that downward pressure."
Prime Medical Office: The Safe Haven Amid Market Uncertainty
In a landscape where many real estate assets are feeling the squeeze, Prime Medical Office buildings continue to stand out as a resilient and safe investment. Healthcare real estate remains essential, driven by the aging U.S. population and the ongoing shift from inpatient to outpatient care. According to the U.S. Census Bureau, the population aged 65 and over is expected to reach 80 million by 2040, fueling the long-term demand for medical office space.
Additionally, while traditional office space continues to struggle with high vacancy rates—reaching nearly 18% in 2023 according to JLL—medical office buildings are thriving, with vacancy rates staying around 7%. Healthcare tenants, typically bound by long-term leases, offer stable and reliable income streams, even during periods of broader market instability.
“Healthcare is a recession-resistant sector,” Waun says. “People need medical care, and medical offices are the frontline. Even when markets are chaotic, healthcare real estate provides stability.”
What Happens After the Election?
As the election cycle winds down and 2025 approaches, many investors expect the Federal Reserve to loosen its monetary stance, potentially reducing interest rates as inflation comes under control. A report by JP Morgan suggests that rate cuts may begin as early as mid-2025, which could lead to a compression in Cap rates and a rebound in property values.
This could be particularly beneficial for medical office buildings, as lower borrowing costs would make it easier for investors to finance acquisitions, boosting demand and driving up valuations. Historically, real estate markets tend to recover in the years following election cycles, as political uncertainty fades and more stable market conditions emerge.
"Lower rates in 2025 could ease the pain we’re seeing in property valuations right now," Waun predicts. "Once we have more certainty around the election and interest rate policy, I expect to see renewed confidence in the medical office market. The fundamentals are strong, and the demand for healthcare services isn’t going away."
Rising Risk in Other Real Estate Classes
While Prime Medical Office buildings offer stability, other real estate sectors are becoming increasingly risky. The traditional office market, already struggling with high vacancies, faces an uphill battle as remote work and hybrid models become more entrenched. Similarly, the retail sector continues to grapple with the rise of e-commerce and changing consumer habits, which have made some properties obsolete.
Cap rates for traditional office space have jumped significantly, rising from 6.5% in 2021 to 7.4% in 2023, leading to sharp declines in property values. Meanwhile, retail properties, especially those in secondary and tertiary markets, are also seeing increased risk as investors reassess their long-term viability.
“Other real estate sectors are facing serious challenges,” Waun says. “Traditional office and retail are under pressure, and investors are rightfully cautious. But Prime Medical Office is different—it’s essential, it’s stable, and it offers long-term growth potential. For investors looking for a safe haven in turbulent times, this is it.”
A Clear Path Forward
While election years often bring financial turbulence, they also provide opportunities for investors to reposition themselves for future growth. As 2025 approaches, the combination of potentially lower interest rates, stabilized Cap rates, and ongoing demand for healthcare services is expected to create a favorable environment for medical office investments.
For investors, navigating the uncertainty of 2024 means looking for assets with long-term growth potential and resilient fundamentals. In the world of commercial real estate, few sectors offer the combination of stability, demand, and growth prospects that Prime Medical Office buildings provide.
As Waun concludes, "In times of chaos, healthcare real estate is a safe bet. The election cycle will come and go, but the need for medical office space will remain strong for years to come."
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