Strong Demand And Tight Supply Boost Medical Outpatient Building Occupancy

The growing demand for healthcare—driven by an aging population and rising rates of chronic conditions—continues to support high occupancy in medical outpatient buildings (MOBs).

However, the landscape of healthcare delivery is shifting. The rise of home-based care and telehealth may reduce the need for traditional outpatient facilities, while broader challenges such as slowing population growth, rising operational costs, and volatility in the health insurance sector present potential headwinds, according to a new JLL report on MOBs.

Over the next five years, outpatient care volumes in the U.S. are projected to increase by 10.6%, compared to a modest 0.9% rise in inpatient care. This continued migration from inpatient to outpatient services is largely driven by advances in medical technology and a growing patient preference for lower-cost, less invasive treatments. Key growth areas in outpatient care include orthopedics, spine, vascular procedures, and oncology.

In response to this shift, health systems are expanding their outpatient footprint, often by acquiring or partnering with physician groups to offer specialized care. According to JLL, health systems were responsible for nearly 50% of the 2.9 million square feet of MOB leasing activity tracked last year, while specialty providers accounted for 31%. Absorption in MOBs surged in Q4, reaching over 19 million square feet across the top 100 U.S. markets. Occupancy climbed to 92.8% in Q4, up from 92.4% a year earlier, fueled by high demand and limited new supply.

Despite strong demand, MOB construction remains muted due to high development costs, volatile capital markets, and more cautious tenants. Construction starts hit a record low in Q4 2024, amounting to just 0.8% of total inventory—down from 2.1% in Q4 2017. As available space remains scarce, healthcare tenants are increasingly exploring traditional office and retail properties near patient hubs. However, converting these spaces can be costly and complex, with concerns over parking requirements and increased operating expenses often deterring landlords.

Average MOB asking rents rose by 2.5% in 2024, slowing slightly from 3.7% in 2023. Four Sunbelt markets posted rent increases above 3%, with Boston and Northern New Jersey also seeing notable gains due to their proximity to expanding health systems. Other markets with strong rent growth included Miami, Richmond, Indianapolis, Pittsburgh, Orlando, Long Island, Austin, Tampa, Minneapolis, and Portland.

The New York metro area led the country in new outpatient move-ins to both leased and owned space in 2024. In Manhattan, more than two-thirds of healthcare tenants moved into non-medical office buildings. Philadelphia recorded the highest net absorption for the year, while Houston and Atlanta each absorbed over 400,000 square feet of MOB space.

Investors continue to favor MOBs for their stable tenants and high renewal rates. Transaction volume rose in 2024, buoyed by Healthpeak’s $4.6 billion acquisition of Physicians Realty Trust. Even excluding this major deal, MOB sales activity increased modestly year over year.

“Health systems and providers currently own about half of the nation’s 1.4 billion square feet of MOB inventory,” JLL noted. “As outpatient strategies grow in importance, ownership allows these systems to control tenant mix and drive internal revenue. If borrowing costs decline, many may pursue strategic acquisitions of adjacent real estate and development parcels.”

Source: GlobeSt.