Medical Outpatient Buildings Ripe for Healthy Investment

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Investors are gravitating toward health care real estate—including medical outpatient buildings—and for good reason, according to Paul Leonard, director of research and real estate for the Americas at Nuveen.

The current environment is an “opportunistic entry point” for investors in medical outpatient buildings, Leonard says, citing favorable conditions including:

1. HIGH HEALTH CARE SPENDING: U.S. health care spending accounts for a large and growing part of the economy. As of year’s end 2023, it represented one-sixth of the U.S. gross domestic product.
2. POPULARITY OF OUTPATIENT HEALTH CARE: Consumers and hospitals have moved toward outpatient treatment because of patient convenience, lower costs, and lower hospital reimbursement.
3. AN INCREASE IN SENIOR DEMAND: Seniors are expected to represent a growing share of the U.S. population, increasing by 70% by 2040. Because seniors spend about three times more on health care than younger age groups, that growth should greatly increase health care spending and strong demand.
4. A STRONG TRACK RECORD: The medical outpatient sector has historically generated higher income returns and lower total return volatility than the average sector.
5. SUPPLY AND DEMAND: On the supply side, developers started delaying projects in 2022, when construction financing tightened. Medical outpatient starts have fallen to half of the 2022 level even though occupancy rates are the strongest on record and demand is expected to be strong.
6. DIFFERENT RISK PROFILE THAN THAT OF OFFICE SECTOR: Medical outpatient buildings are less subject to office sector risks such as remote work. In addition, most developers will proceed with medical outpatient projects only with significant preleasing from providers. Outpatient fundamentals weren’t flattened by the pandemic. They soared while the traditional office sector struggled to recover.