Medical Outpatient Buildings Are a Good Segment for CRE

The face of medical real estate has been quickly changing, as noted in a recent JLL report, Medical Outpatient Building Perspective.

“Demographic trends, technology and reimbursement changes are continuing the shift toward outpatient care, driving demand for outpatient medical buildings,” the authors wrote. “Growing specialties are taking a more holistic view of lifelong health and wellness.”

The financial aspect is enormous. According to the Peterson-KFF health system tracker, people 65 and older comprise 18% of the population and 36% of total health spending. Add in those 55 to 64, and those numbers increase to 31% and 55%.

Procedures and treatments that can be done in outpatient settings typically incur far less expense than the same work done in a hospital. That keeps driving a shift in settings, with inpatient volumes expected to drop 0.7% in the next five years while outpatient is projected to increase over the same period by 10%.

“When I first heard the rebrand of the medical office building to medical outpatient, I said, ‘Is that gimmicky?” Abby Waner Bartolotta, vice president of healthcare solutions at JLL, tells GlobeSt.com. “But it’s a huge difference and it’s so nuanced. The whole way we’re approaching healthcare is it’s shifting away from going to this big office building usually on a campus.”

There are certain specialties in particular helping to drive outpatient treatment in dedicated real estate. Endocrinology is fast growing because of the increase in the prevalence of diabetes and new therapies. In addition, at least 123 cancer centers were opening, expanding or affiliating as of the end of 2023, as Becker’s Hospital Review reported.

Orthopedics and rehab are also likely to see more outpatient work as the population ages. Behavioral health is also well-positioned for outpatient work.

Tech companies getting into healthcare are another reason for the expansion of outpatient properties. “OneMedical, the primary care provider owned by Amazon, is 60% in retail properties, 36% in traditional or medical office and 5% in first-floor retail in multifamily buildings,” according to CoStar data cited by JLL. “Convenience is key for healthcare consumers, so to compete with new entrants, health systems must prioritize this, especially for primary and urgent care needs.”

Making outpatient of interest to investors is a supply and demand issue. There’s been steady demand and limited construction. “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,” JLL wrote. “Absorption has outpaced construction every quarter since Q2 2021 as completions have slowed while demand accelerated. This drove occupancy up from 91.4% at the end of 2020 to 93.0% in Q4 2023.”

“Investors are wanting to know where we’re peaking with interest rates,” Bartolotta says. “There are some new players looking to invest in it, largely because of what happening in office. REITs’ share of medical outpatient buildings is increasing because private investors can’t transact. The makeup of ownership tends to be more REIT heavy, and new ownership is seeing the opportunity to place asset types that are a lot more sticky [and capable of keeping good-credit tenants].”

Current landlords that want to convert existing properties such as office buildings face some basic challenges, like having enough parking spaces or enough distance between a drop ceiling and deck to accommodate specialized HVAC systems. “That right away can reduce the list of potential conversions,” Bartolotta says.