New strategies and product types are creating a healthy market for owners in the sector. Kidder Mathews, the largest fully independent commercial real estate firm in the Western U.S., including an expanding presence in Texas, shared insight with GlobeSt.com on how these market dynamics are shaping the medical office building market.
Owners hold all the cards in the medical office building (MOB) sector. New completions are at a decade low, meaning demand is outpacing new deliveries. Meanwhile, the national vacancy rate is around 7.5%, with overall rent growth averaging 2.5% to 4.0% across all product types. MOB portfolio consolidation, referral clustering and growing behavioral and mental health demand are creating additional tailwinds for landlords.
“For MOB owners, the math has rarely been better,” says Charles Caplice, senior associate in Kidder Mathews’ Bellevue, WA office. “Existing, well-located medical space is effectively irreplaceable.”
Premium product is telling a different story, Caplice adds. With new completions at a decade low, the best-located, well-parked medical buildings should sustain mid-single-digit rent growth through year-end, a pace he expects to hold, if not accelerate slightly, into 2027.
Drew Frame, EVP in Tacoma, WA, says scarcity is also compressing cap rates as investors compete for a limited pool of high-quality, well-located MOB assets.
Michael Dupuy, EVP in Phoenix, expects that strength to continue. “For premium MOB space, I expect rents to continue rising through the rest of 2026 and into 2027, with the strongest growth in the most desirable locations and best buildings,” he says.
“I don’t foresee runaway-train rent growth across MOB through 2027, but I do think Class A inventory will outperform,” adds Barrett Jones, FVP in Dallas. “Flight-to-quality includes healthcare tenants too.”
With limited options, tenants are facing higher rents and annual escalations, along with reduced TI allowances and concessions. Search timelines that once took roughly 12 months can now extend to 18 to 24 months, particularly for plumbing-intensive uses like dental and gastroenterology, as construction costs set a new rent floor above many in-place rates. Frame adds that buildout costs and disruption to patient continuity add to relocation difficulties.
Gary Guenther, EVP and managing director in Bellevue, says tenants can blunt some of that pressure by securing expansion and extension rights early. In his market, MOB rates are rising 3% to 4% annually, in line with the national trend, but with firmer annual increases and fewer landlord concessions.
“The real issue for tenants is not simply higher rent, it’s reduced negotiating leverage caused by a lack of good alternatives,” says Jones. He adds that referral patterns, patients’ willingness to travel, complex build-out requirements, and the capital already invested in a space can make it difficult for tenants, particularly in dense metro areas, to explore alternatives and gain leverage during lease renewals.
Providers must also consider opportunity costs. “The real consequence for tenants is that inefficient real estate becomes increasingly expensive,” says Dupuy. “As occupancy costs rise, healthcare practices will need to pay closer attention to how much space they use and how efficiently they use it.”
Mini-Hub Momentum
The hub-and-spoke “retail-ization” of healthcare has been a reality for years, but health systems are increasingly creating larger, more sophisticated ambulatory locations, or mini-hubs. By bringing primary care and multiple specialties together, these locations can reduce reliance on a traditional hospital campus.
“This is going to impact real estate decision-making at a very high level,” Jones says. “Systems are effectively making a declaration of where they believe healthcare demand is going to migrate to over the coming decades.”
Referral clustering can improve convenience for patients and providers while giving MOB owners higher occupancy, stronger tenant retention, and greater rents. While this doesn’t negate the rent premium of as much as 15% to 20% for high-quality on-campus assets, a well-positioned off-campus hub can perform as well as or better than an older on-campus asset, says Guenther.
Ryan Kershaw, medical/office specialist in Tacoma, sees a related payoff for owners who land these systems as tenants. A creditworthy health system can materially lift a property’s valuation and returns, which is part of why landlords increasingly compete hard to land them.
As portfolios consolidate, MOB investors are increasingly evaluating the broader healthcare ecosystem, including system relationships, referral networks, specialty mix, and market position.
Jones says large healthcare systems are also becoming more disciplined about when ownership makes sense rather than defaulting to it as a growth strategy. They are not necessarily less interested in controlling their real estate, but more selective about where ownership is appropriate versus leasing, build-to-suit development, or joint ventures that preserve capital for labor, technology, and clinical programs.
Kershaw sees a parallel investment trend: healthcare REITs are acquiring MOBs from private owners and funding improvements that reduce vacancy and support rents as health systems increasingly favor leasing. He notes that MOBs are also more efficient than hospitals, with better common-area utilization and load factors.
Fresh Demand Driver
Behavioral and mental healthcare has been an important, emerging demand driver for MOB space. “Behavioral health has gone from a rounding error in MOB absorption to one of the fastest-growing tenant categories in the sector,” Caplice says.
Many behavioral health providers can utilize traditional office or less infrastructure-intensive medical space, resulting in lower improvement costs than other clinical uses. Requirements vary widely, however, particularly around privacy, acoustics, and parking.
Jones notes that some behavioral providers skip MOB space altogether, opting instead for neighborhood retail, power centers, or freestanding buildings where they can control the full patient experience for extended-stay programs.
Kershaw points to favorable economics: behavioral buildouts often cost less than traditional medical space but can command similar rents, giving landlords a faster payback. The open question, he says, is whether that growth is sustainable without outside subsidies.
Cap rate spreads for behavioral and mental health tenants are also compressing versus traditional MOBs. While consolidation has created a more institutional tenant base, owners must still scrutinize payer mix: an operator reliant on Medicaid reimbursement carries very different credit risk than one billing primarily commercial insurance.
Bottom Line
Taken together, limited new supply, evolving health system strategies, and expanding demand from sectors such as behavioral health are reinforcing the strength of the MOB market. For owners, those dynamics are supporting occupancy, rents, and asset values. For tenants, they are raising the importance of early planning, efficient space utilization, and location strategy. As healthcare delivery continues to evolve, well-located, adaptable medical office properties should remain among the sector’s most resilient assets.
Key Takeaways
- New MOB completions are at a decade low while demand keeps rising, pushing national vacancy to around 7.5% and rent growth to 2.5% to 4.0% across product types.
- Premium, well-located MOB assets are outperforming, with mid-single-digit rent growth expected through year-end and into 2027, and cap rates compressing as investors compete for limited high-quality supply.
- Tenants face higher rents, fewer concessions, and longer search timelines (18 to 24 months for plumbing-intensive uses), with reduced negotiating leverage due to a lack of alternatives.
- Health systems are building larger, more sophisticated mini-hubs that combine primary care and specialties, reshaping where healthcare real estate demand concentrates.
- Healthcare systems are becoming more selective about property ownership versus leasing, build-to-suit, or joint ventures, opening opportunities for healthcare REITs and private MOB investors.
- Behavioral and mental health has become one of the fastest-growing MOB tenant categories, often at lower buildout cost, though payer mix (Medicaid versus commercial) remains a key credit consideration.
Contact
Gary Baragona, Vice President of Research