Medical Office Buildings: Hospital-Anchored Economics

Introduction

While conventional office spent the years after 2020 in open structural decline, one slice of office real estate did the opposite: occupancy climbed to a record high near 92.7%, rents outpaced general office, and institutional capital poured in. That slice is the medical office building, and its resilience is not luck. It comes from a tenant base that almost cannot afford to move. A physician practice that relocates abandons specialized buildout, disrupts the patient referral patterns that feed its revenue, and risks severing the hospital affiliation that drives its insurance reimbursement. The result is retention that runs far above conventional office and cash flow that underwriters treat as close to bond-like. Medical office is the defensive anchor of healthcare real estate, and understanding why starts with the stickiness of the tenant rather than the building.

The defining feature of a medical office building is tenant retention, and the numbers make the point. Healthcare Realty Trust, one of the largest pure-play medical office REITs, reported full-year tenant retention of about 82% in 2025, its eighth consecutive quarter above eighty percent. Conventional office landlords would consider that retention extraordinary; in medical office it is the norm.

The reason is switching cost. Medical space is expensive and specialized to fit out, with plumbing for exam rooms, imaging shielding, surgical suites, and dedicated power and ventilation. A practice that has invested in that buildout, often co-funded with the landlord through tenant improvement allowances, has little incentive to walk away from it. Beyond the physical plant, a practice's patients know where it is, referral relationships are geographically anchored, and many physicians depend on proximity to a hospital for admitting privileges and reimbursement. Moving breaks all of that at once.

The demand backdrop reinforces the stickiness. Healthcare delivery keeps migrating from inpatient hospital settings to lower-cost outpatient settings, and the labor data tracks it: medical-office-based employment grew 13% between 2019 and 2024, against 6% for hospital employment. More care delivered in outpatient buildings means structurally rising demand for the exact space these REITs own, which is the opposite of the secular headwind facing conventional office. The same outpatient shift that defines the sub-type is what gives medical office its growth as well as its defensiveness.

The single most important sorting variable within medical office is location relative to a hospital. On-campus buildings sit on or directly adjacent to a hospital, draw their demand from the affiliated system, and command the tightest pricing because the location is effectively irreplaceable. Off-campus buildings serve the same outpatient shift but depend more on the strength of the individual practices inside them.

On-campus medical office building

A medical office building located on or immediately adjacent to a hospital campus, typically leased to physician groups affiliated with that hospital system. On-campus status confers demand certainty (the affiliated system feeds patients and tenants) and frequently a ground lease from the hospital, which is why on-campus assets trade at lower cap rates than off-campus equivalents.

The two profiles diverge across nearly every variable an underwriter checks:

The market has been moving off-campus even as it pays up for on-campus. Roughly 80% of new medical office development now occurs off-campus, as providers push services closer to where patients live and work. Yet on-campus developments are about 150% larger than off-campus ones, because physicians still prefer to cluster near hospitals where the referral and reimbursement economics are most favorable. The pricing reflects both forces: on-campus, Class A assets trade competitively at the tightest cap rates, while off-campus and secondary assets face more repricing pressure when capital tightens. An underwriter who ignores the on-campus distinction will misprice the risk, because the two behave like different asset classes wearing the same label.

The deepest source of medical office's defensiveness is the credit standing behind the rent. Health systems have accounted for roughly 31% of all leasing by healthcare-related businesses since 2019, increasingly directing that space toward patient-facing clinical use rather than administrative offices. When a financially strong, investment-grade-quality health system anchors a building, the lease starts to look less like office rent and more like a corporate credit obligation.

That credit perception shows up directly in cap rates. Medical office cap rates ran from about 5.5% to 8.5% entering 2026, but the tightest tier, buildings leased to hospital systems, traded around 6.0% to 6.5%, often underwritten as credit-rated real estate comparable to a corporate sale-leaseback. The sector as a whole saw cap rates fall to about 6.4% by late 2025, the lowest since early 2023 and down from above seven percent for all of 2024, as sentiment improved and borrowing costs eased. The way tenant credit compresses cap rates is the same mechanism that prices any net-leased asset, but in medical office the anchor is a hospital system rather than a corporate tenant.

Medical office investment volume surpassed $14 billion in 2025, up about 34% year over year, as lower borrowing costs and improving sentiment drew capital back to a sub-type that had held its value through the office downturn. The owner base spans dedicated pure-play REITs, the medical office segments of the Big Three healthcare REITs, and a deep field of private and institutional buyers.

Scale and relationships, not trading

The strategic prize in medical office is scale and relationships rather than trading. Value accrues to owners who can offer a health system a single landlord across its entire outpatient footprint, financing new development, managing existing buildings, and freeing the system's capital to fund clinical operations. That is why the sub-type rewards specialists who build long-term relationships with hospital systems over generalist buyers chasing yield. Health systems themselves increasingly prefer to lease rather than own, monetizing real estate to redeploy capital into clinical care, which keeps a steady supply of buildings flowing to specialist landlords. The leases themselves are typically net or modified gross, so reading the underlying lease structures matters as much as the headline cap rate.

What makes medical office the defensive corner of healthcare real estate is not the demographic story everyone cites but two mechanical facts: clinical tenants face high switching costs and rarely leave, and their rent is increasingly backed by hospital-system credit rather than an individual practice. That combination is why occupancy held near record levels and cap rates stayed well inside conventional office even as that market collapsed. The risk an owner actually underwrites is not vacancy but the health system behind the building, its credit, its strategy, and whether it stays committed to the location. Get the on-campus, system-anchored version of the asset right and medical office stops behaving like office at all and starts behaving like a long-dated corporate credit with a clinical tenant attached.