Providing a lens into the transformations occurring in the healthcare industry, the new ‘US Medical Outpatient Building Perspective’ report discusses factors driving demand for medical office and outpatient properties, real estate fundamentals, how rising construction costs affect the industry, where the growth markets – and opportunities – are, and the market’s appeal to investors.

“Today, a surgery centre or lab services may be in a hospital, office building or even a retail centre,” said Alison Flynn Gaffney, FACHE, president of JLL’s healthcare division. “As patient care continues to grow beyond the traditional locales to outpatient sites closer to where patients live and work, seeking healthcare becomes more accessible. Occupiers and owners must take these shifting preferences and changing demographics into account when looking at opportunities.”

Demand drivers

Demographic trends, consumer preferences, technology and reimbursement changes are continuing to fuel the shift towards outpatient care and, in turn, driving demand for medical outpatient buildings. With the 80-plus population expected to grow by half within the next decade, older populations will drive rapid outpatient volume growth, with patients aged 80 to 84 expected to see about a 65-per-cent increase in outpatient volumes.

Growing specialties are focusing on lifelong health and wellness. Endocrinology, says the report, is the fastest-growing specialty owing to the popularity of GLP-1 receptor agonists as a medication for both diabetes and obesity. Furthermore, patients are living longer, more active lives. The Definitive Healthcare Commercial Claims Database shows a near 20-per-cent jump between 2022 and 2023 in commercial claims for total hip, knee and shoulder replacements. More outpatient surgeries for joint replacements will result in higher demand for rehabilitation services – said to be the second-fastest specialty behind endocrinology.

Technological advancements are also shifting oncology services out of the hospital and into outpatient settings by dispersing smaller cancer care centres closer to patients in neighbourhood hospitals or tied to an ambulatory surgery centre.

“The movement of more treatment options to outpatient sites is about more than convenience,” said Jay Johnson, US practice leader, healthcare markets, at JLL. “It’s about providing better access to care, and the shift to outpatient sites drives down overall costs and, ultimately, improves outcomes for patients. These positive dynamics are likewise driving investor interest in medical properties and beating other real estate investment sectors.”

Improving fundamentals

Even though on-campus medical outpatient buildings (MOBs) typically lead off-campus properties in occupancy, off-campus MOBs saw a greater increase in occupancy from 2019 to 2023, the report finds – with off-campus occupancy increasing 1.9 per cent and on-campus just 1 per cent.

“We believe the shift towards outpatient care will continue to increase demand both for on- and off-campus medical outpatient buildings,” Johnson explained. “To capture revenue moving out of inpatient care, health systems will expand outpatient services, sometimes moving care right across the street to a MOB and outpatient surgery centre in the same building.”

Additionally, where occupancy for traditional offices has declined since 2020, MOBs have seen the opposite. Net absorption for 2023 stood at 16.9 million square feet, and, while slightly slower than annual totals in 2021 and 2022, the pace of demand still exceeds pre-pandemic levels.

Healthcare organisations face thin margins as they focus on optimising patient care. With real estate comprising 8 to 12 per cent of health systems’ budgets – and labour costs rising – they must look for other areas for cost savings. Overall, construction costs are expected to increase 2 per cent to 4 per cent in 2024, and ongoing skilled labour shortages continue to put pressure on prices and timelines.

“Health systems and providers can minimise out-of-pocket costs tied to leasing new office space by evaluating their current space and renovating it to cater to their specific needs,” said Andrew Quirk, institutional industries lead for JLL’s Project and Development Service. “By incorporating innovative methods, technology and processes, the construction phase can become more efficient for healthcare users and developers, enabling them to achieve more with fewer resources."

Market and population growth

Sunbelt markets like Austin, Orlando, Raleigh, Durham and Nashville have high population and employment growth, states the report, which is driving healthcare expansion. The Dallas-Fort Worth area is expected to see the largest volume growth in numerical terms, with Austin seeing the fastest expansion at a growth rate of 23.1 per cent.

Serving a population of 19m, New York has the largest amount of medical office space under construction, but Houston comes in a close second with 1.4 million square feet under construction and growing prominence in healthcare and life sciences.

“Even as population growth is a major driver of new medical office construction, the density and layout of a metro area also factor into construction,” said Kari Beets, senior manager, healthcare research, at JLL. “Patients value proximity and convenience. Like retail, MOB construction follows population growth, causing older MOBs in areas with less population growth to sometimes fall out of favour, and health systems to pivot locations to serve their patients.”

Investor opportunities

Despite the sharp rise in interest rates in 2023, properties with long remaining lease terms and facilities aligned with well-performing health systems are said to be transacting with multiple offers, the report finds. The Los Angeles metro led the nation in MOB sales, with $571 million transacting, followed by the Washington, DC metro area with $486 billion.

If, as many believe, interest rates have now peaked and maybe set to fall, sellers who put marketing processes on hold in 2022 and 2023 will be buoyed and explore taking these to market this year, the report anticipates.

“We’re seeing a narrowing bid-ask gap between sellers and buyers generally with pent-up demand from investors to place capital into higher-quality assets, which have been in limited supply,” said Andrew Milne, senior managing director and Medical Properties Group co-lead, at JLL Capital Markets.