As the healthcare delivery system continues to shift toward outpatient care, a mid-year medical office review by The Laramar Group, a national real estate investment firm, shows a positive outlook for occupancy, rent growth and long-term demand.
These market conditions are generating positive momentum in several Midwest markets such as Chicago, Indianapolis and St. Louis.
An aging population and shifting healthcare delivery dynamics have pushed medical office properties to the forefront for many investors looking for stability and long-term growth. The number of people who are at least 80 years old is on track to increase by 50% during the next decade. This dynamic is expected to create rapid growth in outpatient volume and drive investor demand for medical office properties.
“The long-term outlook for medical office properties is favorable, given the continuing shift toward outpatient locations that provide proximity and convenience to support the aging population,” said Ben Slad, Senior Vice President of Investments for Laramar, which has corporate offices in Chicago and Denver. “We expect to see continued growth and demand in the medical office sector.”
In the Midwest, St. Louis ranked as the eighth top market for medical office construction, with nearly 1 million square feet delivered in 2023, according to research from Colliers and Revista. There was 10.8 million square feet of medical office space delivered across the country in 2023, up from 10.3 million square feet in 2022.
Madison, Wisconsin, had the highest share of medical office buildings under construction when compared with total inventory, reaching 16.2%. St. Louis had a 6.7% share of buildings under construction.
Average net asking rents in this sector reached a record high of $24.37 per square foot in 2023 with the Chicago market ranking ninth with approximately $23 per square foot. Chicago also was the most active sales market in 2023, recording approximately $460 million in activity. The ninth market was another Midwest market, Indianapolis, which had approximately $220 million in sales.
Occupancy rates for medical properties have remained above 90% since the end of 2010, demonstrating the stability of this asset type.
The nature of most work done by healthcare professionals, including x-rays, blood draws, minor surgery and dental work, requires special equipment and facilities as well as patient in-person visits.
While more than 40% of information, tech, professional and business services employees now work from home, the vast majority of healthcare workers either work in a medical office or a hospital. According to the 2021 American Community Survey, just 10% of healthcare workers reported that they worked primarily from home. Medical office has not faced the structural change occurring in the traditional office sector.
An additional demand driver has been the increasing share of the insured U.S. population. The share of the U.S. population that has health insurance has increased from 81% to 90%. The increase in the insured population continues to elevate demand for physician visits as uninsured persons typically do not visit doctors or seek medical care.
Rising construction costs and interest rates have contributed to muted supply. While deliveries in 2023 were on par with 2022, construction starts fell nearly 45% due to elevated borrowing and construction costs, according to Colliers’ research. In 2023, new starts declined from 16.2 million square feet to 8.9 million square feet. At the end of 2023, 31.9 million square feet were under construction.
Despite a multitude of demand factors, future medical office deliveries are projected to remain below the 17-year average. Because of the high cost to build out a medical office space and proximity to patients, medical office tenants tend to remain in the same space for longer, providing stable occupancy. Since 2009, medical tenant retention has averaged in the low 80% range and is currently 82.3%.
Lastly, on a national level, healthcare expenditures have been rising substantially since 1970. National healthcare expenditures as a percentage of GDP were 7.5% in 1970 and are projected to rise to 20% of GDP by 2030. The current share of healthcare spending is outsized for the 65+ age cohort, who comprise 18% of the population but account for 36% of medical expenditures annually.
Healthcare services remain essential regardless of economic conditions. Demographic trends, muted supply and increased insurance coverage are driving long-term growth in medical office demand. These investments can offer strong returns, portfolio stability, and diversification across economic cycles, positioning this asset class as a strategic choice in the current real estate market.
Founded in 1989, Laramar Group is a national real estate investment corporation with a multi-billion-dollar portfolio. Laramar has a presence in more than 15 markets, with historical presence in 50+ markets, and maintains corporate offices in Chicago and Denver.
