Healthcare Real Estate Outlook Remains Bright in an Evolving Environment
The U.S. medical office sector continued growing in 2024, with lower vacancy rates and demand outpacing supply. However, new development was limited because of high construction and borrowing costs. Investment volume rebounded from the 2023 downturn, as investors grew more confident about the sector’s strength and commensurate returns. Interest rates stabilized during the year at the new “normal,” driving additional confidence, while the instability of the traditional office market attracted some capital to medical offices, which is expected to continue.
The outlook for 2025 is cautiously optimistic: investor interest is high, but opportunities remain limited. Potential increases in material costs could limit new development for medical offices and hospitals. Still, demand for medical services will rise as the population ages and the percentage of adults older than 60 grows.
As we look ahead, we see opportunities and challenges that will shape the healthcare industry in the years to come.
Aging Population
The Baby Boomer generation continues to age, resulting in increasing demand for most healthcare services.
Continuing Evolution of Artificial Intelligence (AI)
The integration of AI into healthcare services is in the early stages, but there is a growing awareness of the need to strategize and plan for its integration across multiple specialties and functions.
Co-locating Services
Providers and practices streamline operations by co-locating correlated services within the same or neighboring facilities while optimizing the patient experience.
Inflation and Interest Rate Dynamics
Despite the Federal Reserve’s efforts to reduce inflation over the past several years, rates persist above the targeted goal of 2%. Interest rates have held steady over the past year, providing more confidence in stability and encouraging additional investment.
Lack of Affordable Housing for Healthcare Workers
The rise in home prices around the country makes homeownership more difficult for many in the healthcare industry. At the same time, multifamily rental properties have significantly higher rents, especially in newer properties.
Change in Federal Investments and Spending
The federal government’s cost-cutting may significantly impact the Department of Health and Human Services.
Rising Construction Costs
Materials and labor pricing have risen consistently over the past several years. Proposed tariffs on materials could impact the progress of new projects.
Workforce Shortage
Despite increased employment over the last three years, the healthcare industry needs workers, particularly within specific nursing and physician specialties.
Vacancy: The vacancy rate for the medical outpatient building (MOB) sector dropped 17 basis points from the third quarter to 7.0%. This was the 15th consecutive quarterly rate decline since the peak of 8.6% during the first quarter of 2021.
Rents: Average triple-net asking rents in the MOB sector reached a new high of $24.92/SF in 2024, up 2.7% from one year ago. Limited space availability continues to drive increases in asking rents.
Absorption: Demand continued to outpace new MOB supply for the fourth year. The 18.0 MSF absorbed in 2024 was up 10% from 16.6 MSF in 2023. While 14.3 MSF was completed in 2024, that wasn’t enough to meet the heightened demand.
Construction: More than 14.3 MSF of new space was completed in 2024, the second consecutive year of an annual increase in new space. As of year-end, 24.3 MSF was in the construction pipeline. However, high borrowing costs, labor, and materials pricing led to declining construction at year-end. The 8.3 MSF started in 2024, down from 12.2 MSF in 2023, was the lowest annual total in more than eight years.
New York leads all markets with 1.7 MSF under development as of year-end 2024, 7% of the pipeline for the Top 100 markets. The top 10 markets represent 47% of new MOB construction in the U.S.
Median MOB cap rates rose 60 basis points during the year to 7.3%, the highest cap rate since the second quarter of 2014.
Investment Activity: MOB investment of $14.4 billion in 2024 rebounded 67.3% from the 2023 level but fell below the $20.5 billion invested in 2022. Pricing rose from $302/SF in 2023 to $339/SF in 2024, surpassing the 10-year average of $300/SF.
The largest 10 MOB markets in the U.S. built 4.4 MSF of space in 2024, almost 40% of the total in the Top 50 markets and 30.6% of the Top 100 markets total.
The 6.3 MSF absorbed by the largest 10 markets in 2024 accounted for one-third of the 18.0 MSF absorbed by the Top 100 markets. Houston had the largest absorption, 1.3 MSF, and Philadelphia’s was a close second, 1.0 MSF.
Houston and Philadelphia led the country in new construction completions in 2024 with 970,000 SF and 752,000 SF, respectively. In the 10 largest markets, Boston delivered the lowest amount of new MOB space, only 91,000 SF.
Rent growth in eight of the top 10 markets was at or above the 1.8% year-over-year growth rate for the Top 100 markets combined. Only in Chicago and Philadelphia was rent growth slightly lower.
Healthcare Industry Outlook for 2025
Hospital systems and healthcare providers will encounter many challenges and difficult decisions, including tighter margins and labor constraints. Technological advancements, including the integration of AI on a larger scale, can help streamline operations while advancing medical analysis. Investment and merger activity is expected to heat up as interest rates hold steady, and buyers are poised to invest more in healthcare properties. New federal policies’ effect on construction material prices will impact health systems’ ability to build new facilities.
Challenges
The healthcare industry has added almost 2.0 million jobs since the fall of 2021, surpassing the loss of 1.6 million jobs due to the COVID-19 pandemic during March and April of 2020. The U.S. Bureau of Labor Statistics projects that the registered nurse (RN) workforce is expected to grow 6% over the next decade. However, the retirement-eligible population is rising, adding pressure to backfill those positions as demand for medical services from the Baby Boomer generation increases. The American Association of Colleges of Nursing reported a drop in enrollment for PhD and master’s nursing programs in 2023. U.S. nursing schools turned away more than 65,000 qualified applications due to a lack of faculty, clinical sites, classrooms, and clinical preceptors. As a result, the Health Resources and Services Administration projects a shortfall of 63,000 RNs by 2030.
At the same time, the Association of American Medical Colleges is projecting a physician shortage of 86,000 by 2036. Almost one-fifth of the physician workforce is approaching retirement age, while population growth and aging continue to drive the need for more doctors. The total number of medical school applicants dropped 1.2% in the 2024–2025 school year to the lowest level since 2017–2018.
The shortage of eligible RNs and physicians puts upward pressure on compensation, and overall labor costs continue to rise. Low unemployment rates make attracting and retaining qualified healthcare professionals challenging. This can make expanding service offerings or opening new locations much more difficult.
Another challenge is the rising cost of construction materials. The scarcity of materials has been driving up prices for several years, and potential tariffs announced in early 2025 on aluminum, steel, and lumber will impede development in the short term. Many developers and health systems are looking to stockpile materials to avoid higher costs.
The federal government’s proposed budget cuts are projected to significantly impact the Department of Health and Human Services, but the actual impact is unclear. Proposed cuts to scientific research may also affect potential breakthroughs, funding for research grants, and support of Medicare/Medicaid. While many of these proposed cuts are being challenged in the courts, health systems are paying close attention and evaluating the impacts if cuts are ultimately enacted.
Opportunities
The aging population is placing increased demands on the healthcare industry across a broad range of specialties. This creates opportunities for health systems to expand offerings or look for acquisition targets to add to their capabilities. The shifting demographics also create new geographic opportunities, as many Baby Boomers gravitate towards 55-plus communities further from city centers. Providers are finding opportunities to open new locations closer to these communities.
“The ability to co-locate services is expanding as providers look to maximize the patient experience and streamline operations and services. Putting similar services in the same setting can improve space and time usage. Placing related services (i.e., primary care, imaging, and urgent care) next door to one another can save time in diagnosis and treatment while also helping strengthen patient loyalty and retention.
While the medical use of AI is still in its early stages, its potential is promising. It can streamline administrative tasks such as scheduling and billing, power telemedicine platforms for underserved rural areas, help detect abnormalities in medical imaging, and develop personalized treatment plans.
Moreover, AI’s predictive analytics can assist healthcare resource planning and allocation, enhancing care delivery.
Investment volume is expected to rise in 2025 as confidence in the stability of both interest and Treasury rates increases. The healthcare market offers attractive risk/return investment opportunities driven by a growing population, aging demographics, and underserved regions. In contrast to the broader issues affecting traditional office buildings, medical properties remain resilient as demand consistently outstrips supply.”
Conclusion
Demand for healthcare real estate is expected to increase in 2025, continuing post-COVID trends. Health systems are integrating technology, including AI, on a larger scale to serve patients while updating their infrastructure to be more efficient. Although development may be limited by the high costs of capital, materials, and labor, demand is driving new construction in many parts of the U.S. Finding creative solutions to staffing shortages will be a vital part of keeping high-quality medical care available while enhancing care delivery with a positive patient experience.
