Medical Office Construction Slows As Investor Interest Grows

The development of medical office buildings (MOBs) is slowing sharply, even as investor interest in the sector continues to rise.

According to Marcus & Millichap’s national mid-2025 report, new completions will fall short by about 1 million square feet compared to the 10-year average of 11 million square feet. This supply decline is likely to boost demand and pricing, though effects will vary by market.

In 2025, Texas, Florida, and California—states that made up 30% of national deliveries in 2024—are expected to deliver 50% of all new MOB space. This shift will create localized supply pressures, particularly in metro areas like Houston, Dallas-Fort Worth, Sacramento, and Orlando. In contrast, cities such as Boston, Atlanta, and Nashville will see development drop by at least 40%, potentially easing pricing pressures in those markets.

Older MOBs are increasingly falling out of favor. Properties built before 1980 have vacancy rates two percentage points higher than those built since 2010, highlighting the growing obsolescence of aging inventory. As the population aged 65 and older expands by an expected 10% over the next five years, demand for newer, modern facilities is likely to grow.

Outpatient care continues to lead healthcare expansion, with projected growth of 10.6% over the next five years—far outpacing the 0.9% growth expected for inpatient care. However, rising labor and administrative costs, along with higher out-of-pocket expenses for patients, may slow some of this momentum, particularly for non-essential services.

Despite these challenges, MOB investment activity jumped nearly 40% in the 12 months ending June 2025. Notably, 95% of transactions involved properties priced under $10 million, as investors focused on value-add opportunities such as renovations, portfolio upgrades, or repositioning underperforming assets.

High borrowing costs have dampened larger deals, further concentrating activity in the Sun Belt. Eight of the top 10 metros for MOB transactions are now located in that region, led by Dallas-Fort Worth and Phoenix. Chicago and Philadelphia also stand out, supported by large senior populations. Conversely, investment activity has declined by over 30% in California’s major metros—San Francisco, Los Angeles, and San Jose.

Looking ahead, rising construction costs and a projected shortage of up to 86,000 doctors and nurses by 2036 are expected to further restrict new development. These factors suggest a continued tight supply, which may keep upward pressure on the sector despite headwinds.

Source: GlobeSt.