In the recent Cushman & Wakefield report “Vital Signs,” authors Sandy Romero (Head of Office & Alternatives) and Lorie Damon (Executive Managing Director, Healthcare Advisory Practice) said that the U.S. medical office building (MOB) sector is continuing its strong momentum.
Romero and Damon told Connect CRE that the mid-year report held few surprises. At the start of the year, they anticipated that investors would focus on the sector’s positive underlying fundamentals rather than on higher-for-longer interest rates.
“We also anticipated continued strong occupancy and upward pressures on rents, both of which have been borne out,” they said.
The Supply/Demand Imbalance
The report said Q1 absorption totaled 3.8 million square feet, a 71% year-over-year increase. Meanwhile, occupancy stood at 92.5%, while under-construction inventory decreased by 10%.
The authors cited several reasons for the falling supply, including a decrease in construction and aging MOB stock.
“Further complicating the supply picture is that MOB development competes with other sectors for scarce, viable sites,” Damon and Romero said.
At the same time, healthcare spending increased by 5.8% over the past decade and 8.5% between 2023 and 2024.
Some solutions to address rampant demand include using retail store space and converting offices to medical use. However, retail is out for some specialties. “Some higher acuity healthcare services, such as some surgeries, are regulated and must occur within licensed and accredited facilities,” the authors explained.
And while some have been converted for medical use, this solution isn’t viable in all cases. “Not every office building can be converted readily for healthcare tenancies, due to existing infrastructure, such as floor plates, heights and plumbing,” Damon and Romero said.
Specialties Lead the Charge
According to the report, specialties leading outpatient growth were endocrinology (25.6%) and psychiatry (18.1%), followed by physical therapy/rehabilitation (16.0%), spine (12.9%) and cardiology (9.4%)
The authors said that the increased demand for endocrinology services likely reflects more diagnoses of diabetes and metabolic disorders, as well as new treatment options for these diseases, such as GLP-1 pharmaceuticals.
Demand for psychiatric treatment isn’t new, but results from mental health services’ destigmatization and improved insurance coverage and reimbursement rates. “The COVID pandemic helped highlight the unmet demand for behavioral health services,” Romero and Damon added.
What About the ACA Subsidies?
While healthcare spending is increasing, the question is how much of that spending is borne by patients on Affordable Care Act plans. Insurance subsidies expired earlier this year, leading to one in 10 people dropping their coverage due to premium increases.
During the recent ACA enrollment window, 23 million signed up for 2026 plans, a decline from the 24.2 million the year before. Damon and Romero said that many health systems anticipated that cases of uncompensated and underinsured care would likely increase in the coming years.
“We are not yet fully certain how this change will affect volumes or demand for specific specialties or procedures,” the authors said.
On the other hand, the report pointed out that the U.S. population is rapidly aging. By 2060, one in four Americans will be 65 years or older. This will create significant demand for healthcare services, which Medicare would likely cover.
Looking Forward
The forecast for the MOB sector includes continued supply scarcity, tight occupancy and stable to increasing rent growth. “Construction activity is expected to remain constrained overall, rising only in markets where limited availability necessitates additional supply,” Romero and Damon added.
On the investment side, the report indicated that investors like the underlying fundamentals of the asset type, “including durable income returns and improving appreciation.”
The authors explained that the report helped highlight the sector’s steady performance and resiliency over time. “For many, healthcare is a necessary expense, which helps to sustain demand for services regardless of other economic factors and conditions,” they said.
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