If 2024 was the unofficial year of the medical outpatient building, then what does 2025 hold? The outlook looks solid for five major reasons, according to JLL. However, there are also a number of potential headwinds.
It's important to note, as GlobeSt.com has previously reported, health systems and corporate medical groups are pushing for a shift to outpatient facilities for multiple reasons: cost constraints, more effective use of resources, and outreach to communities.
The first major reason for a strong 2025 is practical. Outpatient volumes are expected to grow 10.6% over the next five years while inpatient volumes only increase 0.9% because of an aging population and increasing disease prevalence. The shift from inpatient to outpatient will continue as advances in technology and medical care make treatments less expensive, safer, and less invasive.
Ironically, another reason for another strong MOB year is the industry's difficulty in keeping up with demand. High construction and financing costs mean developers need better returns on their increased investments. Construction starts were at an all-time low in Q4 2024. That leaves the healthcare industry looking at other possible property types, particularly traditional office. Some landlords may be concerned about increased foot traffic, negative impact on parking ratios, and increases in operating costs. Healthcare companies also tend to be long-term tenants with good cash flow and credit.
Asking rents continue to grow, although the year-over-year rate slowed from 3.7% in 2023 to 2.5% in 2024. Still, steady rent growth and escalations that typically run 3% annually with average terms of 107 months provide growing NOI in the space. MOB-focused REITs show retention rates that topped 80% in the third quarter of 2024.
MOB success will likely be particularly strong in Sunbelt markets. In the top 12 overall, rent growth ranged from about 2.5% in Portland to about 11% in Northern New Jersey. All but one of those markets have vacancies under 10%, and healthcare is highly localized, so finding alternative sources is difficult.
The fifth reason is that the category attracts investors through stability of tenancy and high renewal rates. Compare 92.8% occupancy, 1.9% asking rent growth, and 1.4% total return of MOB to 77.7% occupancy, 0.2% asking rent growth, and -0.6% total return for traditional office properties.
But again, some potential headwinds that could push back on MOB success, including workforce shortages that make it difficult to staff new locations, declining trust in the U.S. healthcare system, slowing population growth, and a shift from in-person care delivery to home health and telehealth advances.