NOI Growth Remains Strong For In-Demand Medical Outpatient Buildings

Despite a slight deceleration in rent growth—from 3.7% in 2023 to a projected 2.5% in 2024—medical outpatient buildings (MOBs) continue to stand out as a high-performing asset class in a challenging office market.

According to a JLL report, MOBs’ financial strength lies in their resilience and consistent outperformance relative to traditional office properties. Top-tier MOBs, particularly those in the 90th percentile of Revista’s top 100 markets, posted a compound annual rent growth rate (CAGR) of 2.4% between 2019 and 2024, outpacing mid-tier buildings, which averaged a 1.8% CAGR. Lease structures are also driving returns: average annual escalators hit 3% in 2024, exceeding base rent growth and adding further value for owners.

High tenant retention remains a critical factor. Healthcare providers typically sign longer leases and renew at high rates—over 80%, per Q3 2024 data from Green Street. Availability is tight, with a national vacancy rate of just 6.9% in Q4 2024. New lease terms averaged nearly nine years (107 months), reinforcing the sector’s long-term stability.

Underlying demand continues to climb, driven by an aging population and increasing disease burden. Outpatient visits are projected to grow 10.6% over the next five years, far surpassing inpatient growth of 0.9%. However, supply remains constrained due to elevated construction and financing costs, which in turn drive higher rents for new developments and widen the pricing gap between modern and aging facilities.

Sunbelt markets are leading the MOB rent surge, supported by strong demographic growth and localized healthcare needs. Northern New Jersey saw standout rent growth of 11%, while Portland recorded a more modest 2.5% increase. Most top-performing markets maintain sub-10% vacancy rates, further tightening supply and increasing demand for premium space.

That said, rising financial pressures on healthcare providers may temper future rent gains. Kaufman Hall reported average operating margins of just 4.9% as of December 2024, while Medicare reimbursement rates dropped 2.83% heading into 2025. These headwinds suggest continued, but measured, rent growth moving forward.

Source: GlobeSt