The Unassailable Asset: Why Medical Offices Are Thriving in a Turbulent Market
While traditional office space struggles, a quiet giant is showing unprecedented strength. Here’s the data-driven case for medical real estate in 2025.
In a world of commercial real estate defined by uncertainty, one asset class isn’t just surviving; it’s setting records. The Medical Office Building (MOB) sector is demonstrating remarkable resilience, fueled by demographic shifts and evolving healthcare models. While headlines lament the struggles of the broader office market, which saw vacancy rates climb to 18.2% in the first quarter of 2025, the MOB sector tells a story of tightening supply and relentless demand. The national vacancy rate for medical outpatient buildings fell to a low of 7.0% in late 2024, the result of 15 consecutive quarterly declines.
A Tale of Two Offices: While the general office vacancy rate hit 18.2%, the medical office vacancy rate dropped to just 7.0%. This stark contrast underscores the unique, demand-driven stability of healthcare real estate.
This resilience is no accident. It’s anchored in powerful, long-term trends. An aging population is a primary driver; by 2034, Americans aged 65 and older will outnumber children for the first time in U.S. history. This demographic guarantees a sustained need for healthcare services, with spending for those aged 65-84 being more than double that of those under 64. Simultaneously, there’s a strategic shift from large hospitals to more accessible outpatient settings, further boosting demand for MOBs.
The Numbers Don’t Lie: A Snapshot of the 2025 Market
Investor confidence in MOBs has rebounded significantly. Transaction volume reached $14.4 billion in 2024, a 67.3% jump from 2023 levels. This renewed activity is stabilizing financial metrics across the board, making the sector highly attractive compared to more volatile asset classes. Lenders often provide more favorable financing for medical properties, sometimes with interest rates 30-50 basis points lower than traditional offices, thanks to the perceived stability of healthcare tenants.
| Metric | 2024/2025 Data | Significance |
|---|---|---|
| Average Asking Rent (NNN) | $24.92 / sq. ft. (up 2.7% YoY). | Steady, consistent rent growth reflects demand outpacing supply. |
| Vacancy Rate | 7.0% (and falling). | Represents a 15-quarter consecutive decline, indicating a landlord-favorable market. |
| Investment Volume (2024) | $14.4 Billion (rebounded 67.3% from 2023). | Shows a strong return of capital to the sector after a cautious year. |
| Average Cap Rate (Class A) | 5.50% – 6.50%. | Compressed rates signal high demand and premium valuations for quality assets. |
| New Construction Pipeline | 24.3 million sq. ft. at end of 2024. | While robust, new construction starts are slowing due to costs, which may further constrain supply. |
Location Analysis: Beyond the Hospital Campus
The mantra of “location, location, location” is evolving. While on-campus facilities remain premium, the fastest growth is happening in accessible, community-based settings. Developers are increasingly repurposing former retail spaces and building new MOBs in suburban areas to meet patients where they live. This trend has created opportunities in diverse markets.
The Sun Belt Boom
Cities across the Sun Belt, like Houston, Phoenix, and Tampa, are hotspots for MOB investment. Houston leads the nation in new construction, while Phoenix saw over $656 million in MOB sales in 2021. This growth is fueled by a business-friendly environment and a significant influx of residents, including a rapidly growing senior population.
Mid-Sized Growth Hubs
Markets like Raleigh-Durham, NC, and Asheville, NC, are emerging as key centers. North Carolina was named the #1 state for business, and its robust healthcare systems are expanding to meet demand from a growing population. These cities offer a balance of strong demand and more accessible investment entry points compared to primary markets.
Established & Undersupplied Markets
Regions like Riverside-San Bernardino, CA, and Long Island, NY, face a clear shortage of medical office inventory combined with high demand from an aging population. In San Diego, the medical office vacancy rate is just 5.2%, well below the national average, making existing properties highly valuable.
The Hidden Math: Calculating Your True Rental Cost & ROI
For a physician or practice manager, the asking rent is just the beginning. Understanding the total financial picture is crucial. One of the biggest variables is the Tenant Improvement (TI) or “fit-out” cost. This is the expense required to convert a raw space into a functioning clinic.
A medical office fit-out can range from under $50 to over $250 per square foot, depending on the specialization. Factors include the need for special plumbing for exam rooms, lead-lined walls for X-ray equipment, and complex HVAC systems. Landlords often offer a Tenant Improvement Allowance (TIA) as part of the lease negotiation, typically a set amount per square foot (e.g., $25/sq. ft.) to help offset these upfront costs. It’s essential to understand whether this allowance covers the full build-out or if the remaining cost will be financed and amortized into your monthly rent.
ROI Explained Simply: Return on Investment (ROI) in this context means ensuring the cost of your space (rent + fit-out) allows you to operate profitably. A higher-cost, prime location might offer a better ROI if it provides superior patient access and referrals, justifying the premium rent.
The rise of telehealth is also changing space calculations. While specialties like surgery and diagnostics still require significant physical footprints, practices focused on primary care or mental health may need less space. However, the overall demand for medical real estate continues to grow, as telehealth often complements, rather than replaces, in-person care and can even expand a practice’s total patient base.
Too Long; Didn’t Read
- Market is Strong: Medical office real estate is outperforming the general office market, with vacancies at a multi-year low of 7.0% and rents steadily rising.
- Demographics Drive Demand: An aging U.S. population and a shift to outpatient care are creating sustained, long-term demand for medical facilities.
- Smart Investment: The sector saw investment volume rebound by over 67% in 2024, with investors attracted to stable tenants and favorable financing terms.
- Growth is Suburban: The biggest opportunities are now in accessible suburban locations in the Sun Belt and mid-sized growth cities, not just traditional hospital campuses.
- Calculate All Costs: Remember to factor in fit-out costs, which can range from $50-$250+ per square foot, when evaluating a lease.
