Sun Belt Metros Dominate Medical Office Investment Surge
Amid subdued national construction activity, several U.S. markets are seeing a marked acceleration in medical office investment, driven by robust demographic trends and a geographic shift in transaction volume. According to the latest Marcus & Millichap report, this year’s medical office delivery pipeline remains a million square feet below the past decade’s annual average, with Texas, Florida and California emerging as outsized contributors, now comprising over half of national completions.
This concentration is intensifying short-term supply pressure in metros like Houston, Dallas-Fort Worth, Sacramento and Orlando, pushing investors to reassess their market strategies amid regional imbalances and rising operational headwinds.
The report reveals that investment growth is predominantly a Sun Belt story. Of the ten most active U.S. metros for medical office trades, eight are in the Sun Belt. Dallas-Fort Worth and Phoenix dominate transaction volume, trailed by Atlanta, Los Angeles and Houston.
Even as Los Angeles maintains its rank, it is showing clear cooling, along with San Francisco and San Jose, all posting a decline of 30 percent or more in trade tallies compared to pre-pandemic figures. In stark contrast, the Inland Empire is the only California market to see a post-pandemic upswing in trading, a rare bright spot in an otherwise slowing state landscape.
Nationally, deal flow climbed sharply, with medical office investment surging roughly 40 percent year-over-year through June. Private buyers, who accounted for 95 percent of trades—primarily under $10 million—are increasingly targeting value-add opportunities, such as properties with deferred maintenance, high vacancies or those primed for conversion. Many are leveraging 1031 exchanges or negotiating sale-leasebacks, gaining exposure to healthcare tenancy with more predictable net operating income.
Higher borrowing costs have sidelined institutional and capital-intensive investors, further tilting the sector toward sub-$10 million transactions. Despite these shifts, the mean price per square foot across trades nudged up to $295, with average cap rates remaining stable at 7.4 percent.
Although Texas, Florida and California collectively dominate new construction, many metros outside these states are experiencing historic declines in supply. Annual deliveries have plummeted by 40 percent or more in markets such as Boston, Atlanta and Nashville, tightening available supply and contributing to regional investment disparities.
Notably, Chicago and Philadelphia also ranked among the nation’s most active medical office transaction markets, buoyed by their aging populations and the corresponding demand for outpatient care.
The industry’s headwinds are nontrivial, with vacancy expected to rise to 9.2 percent by year's end, reflecting an imbalance between new space and leasing activity, as older medical office product struggles to retain tenants. Properties built before 1980 face vacancy rates approximately 200 basis points higher than those delivered after 2010.
Despite these hurdles, the tailwinds remain significant. The population segment aged 65 and older is forecast to grow by 10 percent over the next five years and outpatient utilization is set to rise 10.6 percent, reinforcing demand across core and emerging Sun Belt metros alike.
Ultimately, the evolving regional and demographic contours of demand are separating growth markets from stagnating ones. Sun Belt metros—led by Dallas, Phoenix, Atlanta and Houston—are attracting capital that underscores investors’ focus on both demographic resilience and delivery pipeline dynamics.
With sustained interest in value-add and sale-leaseback models and a growing preference for net-leased, credit-grade tenancy, these regions are likely to stay at the forefront of medical office investment momentum for the foreseeable future.
Source: GlobeSt/ALM