Medical Office Landlords Gain Leverage as Supply Shrinks

Medical office landlords are gaining leverage as scarce supply tightens tenant options. GlobeSt’s review of medical office leasing conditions puts national vacancy near 7.5%. Overall rent growth is averaging 2.5% to 4.0%. New completions are at a decade low, and owners of strong locations are benefiting from limited alternatives.

Scarcity Shifts Negotiating Power

The supply shortage is changing both leasing and investment behavior. Tenants are facing higher rents, firmer annual escalations and smaller improvement packages. Searches that once took about 12 months can now stretch to 18 to 24 months. Plumbing-heavy users such as dental and gastroenterology practices face added constraints because specialized buildouts make relocation harder. Investor competition is tightening at the same time. Drew Frame said scarcity is compressing cap rates for high-quality medical office assets.

Owners of well-located buildings also have more leverage during renewals because tenants face fewer viable alternatives and higher relocation costs. Gary Guenther said rates in his market are rising 3% to 4% annually, broadly in line with the national trend. Landlords are also pushing firmer annual increases and offering fewer concessions. Construction costs have set a new rent floor above many in-place rates, making older leases harder to replace economically.

The Details

Health systems are also changing how they use medical real estate. Larger ambulatory mini-hubs are bringing primary care and multiple specialties together outside traditional hospital campuses. Referral clustering can improve convenience for patients and providers. It can also support occupancy, tenant retention and rents for landlords that assemble the right mix of users.

High-quality on-campus space can still command rent premiums of 15% to 20%. However, Gary Guenther said a strong off-campus hub can perform as well as, or better than, an older on-campus asset. Creditworthy health-system tenancy can also lift property values and returns. Behavioral and mental healthcare is adding another demand source. Many providers can use traditional office layouts or less infrastructure-intensive medical space. That can lower improvement costs while still supporting rents similar to other medical users.

Requirements vary around privacy, acoustics and parking, and some operators choose retail centers or freestanding buildings instead. Health systems are becoming more selective about ownership. Leasing, build-to-suit projects and joint ventures can preserve capital for labor, technology and clinical programs. Healthcare REITs are also buying medical office buildings from private owners and funding improvements as systems increasingly favor leasing.

Why It Matters

The market is rewarding properties that combine location, parking, adaptable space and strong referral networks. For owners, those traits can support occupancy, rent growth and asset values. For tenants, the same scarcity reduces negotiating leverage and raises the cost of inefficient real estate. The shift is also reinforcing medical office investment interest as investors compete for a limited pool of quality assets. Behavioral health can improve landlord economics because buildouts may cost less than traditional clinical space.

Owners still need to scrutinize payer mix because reimbursement sources can materially change tenant credit risk. Healthcare providers face a different calculation. Existing buildout investment and patient continuity can make moving expensive. Jones said tenants in dense markets may have few practical alternatives, especially when referral patterns and specialized infrastructure matter.

What’s Next

Premium medical office space is expected to keep gaining through 2027. Charles Caplice expects mid-single-digit rent growth in the best-located, well-parked buildings through year-end, with that pace holding or edging higher next year. Dupuy also expects premium rents to keep rising through 2026 and into 2027. Tenants can respond by starting searches earlier and securing expansion or extension rights before options narrow further.

Owners will be watching health-system consolidation, specialty mix and referral patterns as those factors shape portfolio value. Behavioral health remains a growth driver, although Ryan Kershaw said its long-term durability without outside subsidies is still an open question.