Medical Office

• Health care real estate is positioned to outperform in 2026, supported by demographic tailwinds, sustained outpatient demand, and its role as a core defensive asset.

• Tight market conditions and limited new construction will continue into next year, maintaining upward pressure on rents and reinforcing stable fundamentals.

• Investor activity is expected to strengthen in 2026 as capital markets ease and confidence builds around the sector’s long-term growth trajectory.

In times of market uncertainty, investor focus tends to shift to sectors that are anticyclical and can weather a storm. The inelastic demand for health care services and the real estate that supports it becomes even more attractive. Despite an overall softening of the labor market, health care continues to be one of the strongest sectors tracked by the Bureau of Labor Statistics: health care employment growth annually was 2.8 percent as of August 2025 (down from approximately 4 percent levels in 2024) while total nonfarm growth has slowed to 0.9 percent as of August (from levels of 1.3 percent in 2024). 

Demand for health care services continues to grow as the population ages, new discoveries and medical advances increase the amount of medical issues that can be addressed, and the focal shift from reactive medical care to preventative care and wellness continues. The real estate that supports the health care system is largely made up of hospitals and inpatient care and medical office buildings or medical outpatient buildings (collectively, MOBs). There are 7,273 hospitals in the United States making up 1.9 billion square feet and 42,260 MOBs representing 1.6 billion square feet. MOBs can include any number of tenant types and services including urgent care and emergency services, dialysis, ambulatory surgery, and imaging, as well as standard physician offices. 

The MOB sector has continued to see an increase in demand. With advancements in health care technology, many services are now able to be performed in an outpatient setting rather than inpatient, freeing up space in the hospital for more advanced and complicated cases. In recent years, many of these MOB locations have been moving off-hospital campus and out into the community to make them more accessible for patients. This helps providers and hospital systems build market share and more effectively serve a wide range of patients and cases.

Despite increasing demand for the MOB sector, the recent passage of the “One Big, Beautiful Bill” (OBBB) has created several questions for investors and stakeholders to consider. The OBBB was signed into law on July 4, 2025. The bill calls for steep cuts to Medicaid of almost $1 trillion over 10 years. There is concern within health care circles that rural providers with a higher prevalence of Medicaid patients will feel the worst pain while many hospitals will see their uncompensated care costs rise, impacting cash flow and profitability. The bill also rolls back parts of the Affordable Care Act, and the Congressional Budget Office estimates that millions could lose health care coverage. This could result in the uninsured choosing to visit the local emergency room rather than their local doctor’s office. However, the bill could also benefit the MOB/outpatient sector as health systems and providers may choose to invest in lower-cost settings of care. Many of the impacts from the OBBB remain to be seen but it is wise to consider these topics in an analysis of the MOB sector.  

Occupancy rates across the top 100 metro areas for MOBs have been on the increase for several years. Emerging from the COVID-19 pandemic, a new paradigm for MOB fundamentals has taken hold. Construction levels have fallen as construction costs have risen while, at the same time, demand for space has increased. This has caused the occupancy rate to reach a cyclical high in 2025 of 92.7 percent in the top 100 metro areas (see chart below). During the past three years, 44.4 million square feet of MOB space has been completed within the top 100 metro areas, while absorption (the change in occupied space) has increased by 48.9 million square feet. The result during these three years has been an increase in the occupancy rate of 70 basis points (bps) to 92.7 percent in 2Q25. While high occupancy rates are the result of strong fundamentals, they often lead to “tight” conditions in many markets where providers and other tenants have limited space options to consider for growth.  

With this, rents within the MOB sector continue to rise. The average triple-net (NNN) rent across the Top 100 metro areas was $25.35 per square foot as of 2Q 2025. The average NNN rent has climbed by 8.8 percent from three years ago, averaging year-to-year rent growth of 2.4 percent over the past three years and currently 1.8 percent.

Looking at the MOB markets, different pictures emerge regarding growth opportunities as well as current conditions. Growth markets have generally been in the southern part of the United States. Metro areas within Florida, for instance, have outperformed most other markets on occupancy growth, absorption, and even completions during the past several years. In 2019, significant portions of Florida’s certificate of need laws were repealed. This helped to spur a boom in hospital and outpatient construction, which was pushed further by population growth due to Florida’s response to the COVID-19 pandemic.  

Metro areas in Texas have also seen greater amounts of construction during the past few years. Houston is the number one ranked market as of 2Q 2025 for trailing 12 month (TTM) net absorption. With 46.6 million square feet in inventory, Houston’s MOB market had absorption of almost 900,000 square feet during the past year while completions were approximately 520,000 square feet resulting in TTM net absorption of 374,830 square feet. The top 25 markets ranked on TTM net absorption as of 2Q 2025 are listed in the table below. Metro areas along the coasts generally boast higher MOB occupancy rates compared to other markets. Los Angeles is the second-ranked metro with 218,072 square feet of TTM net absorption and an occupancy rate of 92.7 percent in 2Q 2025. Philadelphia is third, at 162,124 square feet and is also 92.7 percent occupied as of 2Q 2025.  

Investors also target other markets on the notion that health care is everywhere, and you can often find strong outpatient ecosystems in interior, smaller, or even tertiary markets. Milwaukee makes the 2Q 2025 list with 78,945 square feet of TTM net absorption. Milwaukee also has the 120th ranked average NNN rent at $16.33 in 2Q 2025, which could provide an upside in rent growth for some investors.  

MOB transaction volume is still slow throughout the first half of 2025. Transaction volume was just $3.7 billion compared to $4.8 billion in the first half of 2024. Despite the lower volume, there are indications that MOB transaction activity will pick up in the second half of 2025. The recent decision by the U.S. Federal Reserve to cut interest rates is good news for borrowers. Lenders are reporting that spreads are tightening slightly, which can also help facilitate transaction activity. For these reasons, there is optimism for transaction activity heading into 2026 as well. There are also several portfolios currently on the market, and a large portfolio of 33 MOBs was purchased in September 2025 in a sale–leaseback transaction.

The resurgence of portfolio transactions has also pushed a favorite investor strategy within the MOB sector. The idea is that an investor can create additional value by utilizing an aggregation or portfolio strategy. The data supports this strategy over the long term. From the period 2017 to mid-2023, MOBs that traded as a part of a portfolio had a cap rate that was roughly 60 bps lower than MOBs that traded as a single property. But in mid-2023, the investment world changed and the “portfolio premium” all but disappeared, so portfolios were generally not trading. This changed, however, toward the end of 2024. With the resurgence of portfolio transactions, the premium has also returned. As of 2Q 2025, the average MOB portfolio cap rate was 6.5 percent, which compares to 7.2 percent for an MOB that trades as part of a single property/asset (see chart below).  

MOB construction activity appears to be near a cyclical bottom in 2025. Overall, the in-progress pipeline is still near a cyclical low of 33.5 million square feet. Completions are still outpacing construction starts. TTM completions were 19.2 million square feet in 2Q 2025, compared to 22.4 million square feet one year ago.   

A big reason construction levels are low in the sector is that the cost of building has risen dramatically over the past few years. This translates into developers needing to charge higher than market rents to successfully deliver a project to a client. An analysis by RevistaMed shows that newer MOBs have a NNN rent of $33.06 per square foot compared to $24.78 for existing MOBs (see chart below). This gap of over $8 per square foot has risen over the past few years. This data provides an opportunity for investors to have data driven discussions with health systems on rents for new construction. It also provides intelligence for owners of existing properties to capture as much of the $8-per-square-foot gap through redevelopment or renovation.  

Despite the construction lows, there are signs that construction may be picking up, albeit slightly. Construction starts have risen each of the past three quarters and in 2Q 2025, 5.8 million square feet of MOBs started construction. This figure is up dramatically and is the highest quarterly value in three years. This may be a sign of increased construction activity to come.

A shift toward outpatient care and an aging population are some of the secular trends in place that will help fuel the outpatient sector for years to come. Supply and demand fundamentals within the MOB sector are also resistant to a slowdown in the economy. These characteristics have attracted many investors to the sector over time. Beyond these strengths, potential challenges include local health care market dynamics, potential impacts from the One Big Beautiful Bill, and overall U.S. health system changes.  

—Revista