Why The Medical Office Sector Isn’t Worried About $1T In Federal Medicaid Budget Cuts

The recently passed “One Big Beautiful Bill Act,” signed by President Donald Trump, includes more than $1 trillion in Medicaid cuts—potentially stripping healthcare coverage from 12 million Americans

On the surface, this could spell trouble for healthcare real estate. But the medical office sector isn’t sounding the alarm. While owners and investors are treading carefully—paying closer attention to tenants’ financials—they remain largely confident in the sector’s resilience. Medical office properties have historically weathered policy shifts well, and most insiders believe this time will be no different.

“For landlords, the key question is whether tenants can still pay rent,” said Vikram Malhotra, managing director at Mizuho Americas. “While there may be some theoretical impact from reduced patient volume and revenue, we don’t see it threatening rent payments significantly.”

Strong demand, driven by aging demographics and rising healthcare needs, continues to support the sector. Since the tail end of the pandemic, medical office leasing has steadily improved. According to RevistaMed data shared by Avison Young, occupancy rose to 92.6% at the end of June—up 15 basis points from the previous quarter. Rent growth has remained positive, and net absorption hit 0.5% of total inventory, a level reached just three times in four years.

Wesley Preuss, a principal at Avison Young in Virginia, noted that her medical tenant clients watched the legislation closely but ultimately didn’t see it as a dealbreaker for expansion.

“Demand remains strong, and while clients are more cautious with capital decisions due to the bill’s uncertainty, we haven’t seen anyone fully pause their plans,” Preuss said.

Hospitals—especially in rural or low-revenue areas—face the biggest risk. Medicaid covered about 20% of all hospital spending in 2023, per KFF, a health policy research firm. Systems that rely heavily on Medicaid are now re-evaluating budgets and operations.

For outpatient medical tenants, the fallout is less clear. These providers may see fewer referrals or slower reimbursement if states reduce funding due to new provider tax limitations. Still, Malhotra says landlords aren’t pulling back—they’re just digging deeper into tenant finances.

“I don’t think this legislation will stop most tenants from expanding,” Malhotra said. “But landlords are taking a more conservative approach to underwriting.”

The bill’s healthcare cuts sparked intense political debate. Republican Sen. Tom Tillis of North Carolina criticized the legislation, prompting President Trump to threaten a primary challenge. Tillis later announced he wouldn’t seek reelection.

The Congressional Budget Office projects that beyond the 12 million expected to lose Medicaid, another 5 million could lose marketplace coverage by 2026 due to changes in the healthcare system. Proponents argue that stricter requirements will reduce fraud and encourage self-sufficiency, while critics warn of the impact on vulnerable populations.

The cuts won’t take full effect immediately. About $340 billion in hospital funding reductions are delayed until 2028—a timeline that healthcare lobbyists are already working to alter. Preuss noted that some stakeholders are hopeful the harshest provisions may never be fully implemented. In the meantime, investors are shifting strategies. Properties with tenants who rely heavily on Medicaid are receiving extra scrutiny.

“When I look at a deal now, I have to consider the payer mix. If Medicaid makes up a big chunk, it gives me pause,” said Eliott LaBreche, founder of Vitalis, a medical office investment firm.

Location and demographics have always played a big role in medical real estate valuations, but Medicaid cuts are amplifying that divide. Rural healthcare systems face disproportionate challenges, while urban markets with higher incomes and aging populations are becoming safer bets.

To ease the burden on rural hospitals, the bill includes a $50 billion transition fund, aiming to help them move away from Medicaid dependency. It also ends a tax-code workaround that previously boosted federal payments to these facilities.

“Whether you’re a mid-market buyer or a big institution, everyone’s looking at strong primary markets now,” LaBreche said. “That’s going to hurt tertiary areas that rely on Medicaid.”

LaBreche launched Vitalis in 2021 during a hot real estate market, but things have cooled. His firm now owns $250 million in outpatient medical buildings across 16 states. Rising interest rates and economic uncertainty have slowed acquisition activity—especially from investors.

“Our saving grace has been working directly with physicians—buying buildings from them and doing sale-leasebacks,” LaBreche said. “What’s dropped off is volume from other investors. Their properties have taken a hit in value.”

Source: Bisnow