By Chip Conk
Our View of the Medical Office Marketplace
Two months into this new year—our 19th in medical real estate—we at Montecito are as excited as ever about the long-term prospects for our field. Significantly, we are also more excited about the short-term prospects in the coming year than we were at the end of 2022 and 2023.
During Q4 of 2024, we saw accelerated momentum across the medical real estate landscape following the Federal Reserve’s interest rate reductions in September and November. Though it remains unclear whether rates will decline further in 2025—the Fed’s most recent guidance is that it intends to “move with caution”—early signs nevertheless point to growing activity in the MOB market, increasing access to capital for buyers and acquisition volumes that we believe will be higher than the past two years.
We are seeing two other trends that fuel our optimism in the early stages of 2025. First, we saw the industry’s first portfolio sales for the year in Q3. We believe this will not be an isolated development but the beginning of a trend. While we do not expect portfolio sales to rebound to the levels we saw in 2021 and early 2022, we are encouraged by the interest in a portfolio currently offered by Montecito. Though interest rates will need to fall further to attract more portfolio buyers, we believe smaller portfolios will be attractive to investors in 2025.
Second, health systems, which traditionally have not been sellers of their medical office properties, increasingly are exploring opportunities to monetize some of their real estate assets in response to rising costs and shrinking operating margins.
Along with the financial pressures, the shift in the site of care delivery away from hospital campuses to outpatient buildings closer to where patients live and work is impacting health systems’ real estate strategy and capital allocation. According to a report by CBRE, 80% of new medical outpatient buildings are being developed away from hospital campuses in residential and retail districts. That means providers seeking to compete effectively must expand their real estate footprint in an environment of higher borrowing costs and reduced access to capital.
In response to this trend, we are pursuing more opportunities to acquire medical office properties from health systems and hospitals and become partners in helping them develop and execute their real estate strategies. In 2024, our tenant mix included a higher percentage of health systems than in prior years, and we anticipate that this will continue in 2025 and beyond as we explore buying opportunities from this class of sellers that typically offer excellent credit ratings and stability.
Meanwhile, our acquisition pipeline remains at a record level following a very strong close to 2024 and an activity-filled start to 2025. Banks and other capital sources regard medical offices as a proven and creditworthy asset class. The fundamentals undergirding this sector are rock-solid. Our tenants’ healthcare businesses are healthy, and demand for their services remains high (and growing).
According to Cushman & Wakefield, after 15 consecutive quarters of growth, occupancy rates for outpatient medical offices reached 92.8%. (While that represents a record high, it’s worth noting that the occupancy across Montecito’s portfolio is 99%.) With healthcare spending rising as the number of Americans ages 65 and over surpassed 61 million (heading toward a projected 70 million by 2030), CBRE Research suggested that “2025 could likely be called the year of MOBs.”
So far, that appears to be a reasonably solid prediction.
Chip Conk is CEO of Montecito Medical Real Estate
