Nobody Is Building Medical Offices. Everybody Needs One.

Where everyone else is standing

Start with an honest read of the two sectors most investors are looking at right now, because the popular version of both is a little off.

Retail is tight — but not because demand is surging. Availability sits at 4.9%, near historic lows, with asking rents at $24.79/SF, up 2.4% (CBRE, Q2 2026). Retail is now 14% of all U.S. investment volume, a ten-year high. But Colliers recorded negative 4.3M SF of net absorption in Q1 2026, and more than 150 million SF of obsolete retail has been removed or repurposed since 2020. Retail is tight because the denominator shrank and nothing is being built — not because tenants are expanding. That's still a good setup. It's just a different one than "retail is hot."

Multifamily is soft on price, not on occupancy. Vacancy fell 50 bps quarter-over-quarter to 4.3% in Q2 2026 — still marginally higher than a year ago — with a record 167,500 units absorbed against 77,700 completions — all 69 CBRE-tracked markets absorbed positively. And yet asking rent growth is +0.5% year over year, apartment values sit roughly 19% below their 2022 peak, MSCI's apartment price index is the only major sector in negative territory, and Austin and Denver are forecast to post negative asking rent growth this year. Buildings are full. Pricing power isn't back. And starts have already turned up off their trough, which caps how far the recovery runs.

So: one sector where the supply story is doing the work, and one where occupancy has recovered but pricing hasn't.

Now look at the sector where both are working at once.

The supply math

Medical outpatient buildings — MOBs, still commonly called medical office — are running at 92.5% occupancy across the top 50 markets, with 3.8 million SF of net absorption in Q1 2026, up 71% year over year (Cushman & Wakefield). JLL puts occupancy at 92.7% and calls it a record. CBRE has recorded five consecutive quarters of positive absorption.

Against that, the pipeline:

• Construction equals 2.2% of existing inventory, and fell 10% year over year (Cushman & Wakefield, Q1 2026)

• CBRE projects 2026 completions fall 26%, to the lowest level in more than a decade

• 2025 starts were 29.3% below 2019, with developer-led starts running 50% below 2019 levels (JLL)

• Health systems now account for 57% of construction square footage — the merchant-developer channel has essentially shut

Compare that to retail, where 53.2M SF sits under construction nationally, or multifamily, which delivered 77,700 units in a single quarter.

Why so little gets built is the part worth understanding, because it determines how long this lasts. Medical space costs roughly 50% more per square foot to build than conventional office. Mechanical, electrical and plumbing alone runs 28–32% of a healthcare construction budget. A single MRI suite adds hundreds of thousands of dollars in RF shielding, structural reinforcement and dedicated electrical. Section 232 tariffs put 50% duties on steel, aluminum and copper in 2026.

And rents haven't followed. New construction leases around $33/SF against $24.78/SF for existing space — JLL puts new-build above $40/SF against in-place rents in the mid-$20s. New construction rents run close to double in-place rents, and still don't justify the cost.

That is a supply constraint you cannot fix with capital. It fixes itself only when rents roughly double, and rents are currently growing 1.3% to 1.9% a year.

The tenant math

Occupancy statistics tell you a building is full. Retention tells you whether it stays full.

From Q2 2026 disclosures at the three largest public owners of outpatient medical:

Healthcare Realty reports an average lease term of 5.7 years with 3.0% annual escalators, and raised full-year same-store cash NOI guidance to 4.25–5.00%. Healthpeak reported 3% escalators across essentially all leasing.

The mechanism behind those retention numbers is the most durable thing about this asset class. A physician practice's build-out runs $200 to $400+ per square foot — exam rooms, imaging, lead shielding, medical gas, HIPAA acoustics, infection control. Landlord improvement allowances typically cover a fraction of it. The tenant funds the balance, it is permanently attached to that suite, and it does not move.

Add the part that isn't on any rent roll: a practice's patients come to that address. Relocating three miles costs a share of the panel. So leases renew, escalators compound, and the landlord's leasing cost per square foot stays low.

Contracted rent, fixed 3% growth, a tenant who can't afford to leave. That's the entire investment case, and it doesn't require a market view.

The demand math

This is where medical outpatient separates from every other necessity asset — the demand curve is demographic and already visible.

The population is aging into the product. All 73 million baby boomers will be 65 or older by 2030, and the 65+ cohort is projected to grow by roughly 11 million over the next decade. CDC data puts office-based physician visits at 498 per 100 persons for adults 65+, against 190 for adults 18–44 — about 2.6 times the utilization rate. (That visit-rate series is 2016 data, the most recent clean age-banded table published; the ratio has been stable, but it is dated.)

Care keeps moving off the hospital campus. Vizient's 2026 Impact of Change forecast, released June 30, 2026, projects outpatient volumes up 20% over the next decade against inpatient care up 7%. In oncology the split is starker: outpatient +20%, inpatient +2%. The American Hospital Association's framing of the same data is that ambulatory care becomes the "new center of gravity."

The substitution is documented, not theoretical. MedPAC counted 6,436 Medicare-certified ambulatory surgical centers in 2024, growing 2.2% annually, with Medicare fee-for-service ASC spending of $7.5 billion and per-beneficiary spending up 15.9% in a single year. Research cited in the same MedPAC chapter found that an ASC entering a market with no prior ASC reduced hospital outpatient surgical procedures by 7% while total outpatient volume rose.

The spending trajectory backs it. CMS's Office of the Actuary projects national health expenditures growing 5.4% annually through 2034, reaching roughly $9 trillion and 20.6% of GDP, with physician and clinical services — the MOB-relevant line — growing 5.5% a year.

And telehealth did not eat it. The common objection deserves a real answer: telehealth's share of all healthcare visits went 1.84% (2020) → 4.53% (2021) → 4.5% (2022) → 4.81% (2023). It spiked, then plateaued below 5%. People still drive to the doctor.

The risks. All of them.

An honest case includes the parts that don't help.

Coverage losses are coming. The 2025 budget reconciliation act carries roughly $1 trillion in healthcare spending reductions over ten years. CBO projects roughly 10 million more uninsured by 2034, with several million more if enhanced premium tax credits expire. Fewer insured people means fewer paid visits. JLL sizes the hit at 14.9 million fewer outpatient visits — against 227.4 million additional visits projected over the next five years. The headwind is real and it is roughly 6.5% of the tailwind. Note also that these effects are largely prospective: fact-checkers reviewing 2026 enrollment found the declines to date are not yet attributable to the act.

Provider credit is concentrating in exactly the wrong place. As of January 2026, 82% of U.S. physicians are employed by hospitals or corporate entities, up sharply since 2018 (PAI/Avalere). That improves the average credit and worsens the concentration. Meanwhile healthcare Chapter 11 filings fell to 45 in 2025 from a 2023 peak of 79 — but 67% of 2025 filings were middle-market operators with $10–100M in liabilities. That is precisely the single-tenant MOB credit profile.

Reimbursement is a mixed bag, not a disaster. The CY2026 Medicare Physician Fee Schedule actually raised conversion factors 3.26–3.77%, applied a −2.5% efficiency adjustment to work RVUs across roughly 7,700 codes, and shifted practice-expense weighting in a way that favors office-based settings over hospital-based ones. Directionally that helps off-campus outpatient tenants. It is not a clean win.

The capex is heavy and it is recurring. Second-generation medical space frequently needs a full re-fit for the next specialty. Model turnover cost honestly or the yield is fiction.

Financing is tight against the cap rate. Cap rates sit in the high 6s to low 7s. Where borrowing costs land near or above that, leverage works against you rather than for you. Underwrite the loan constant against the going-in cap rate before you underwrite anything else.

And on cap rates, the data houses disagree. Cushman & Wakefield puts MOB cap rates at 6.8%, compressed 35 bps year over year. CBRE puts them at 7.1%, expanded 4 bps. Same market, same period, opposite directions. Anyone quoting one without the other is selling something.

What it is, and what it isn't

One more piece of honesty, from the sell side of the sell side. On Ventas's Q2 2026 call, management explicitly contrasted outpatient medical's mid-single-digit NOI growth against senior housing operations at 16%.

That's the right frame. Medical outpatient is a stability asset, not a growth asset. You are buying 92%+ occupancy, five-to-six-year terms, 3% contractual escalators, high-80s retention, and a supply pipeline that cannot open for years. You are not buying a rent spike.

For an income portfolio, that's the point. The one number that summarizes it: MOBs traded at $307/SF in Q2 2026 against $196/SF for traditional office — a 57% premium. The market has already stopped treating this as office. Underwriting that still does is underwriting the wrong asset.

How we'd approach it

Four rules if you're looking at this space.

Location beats building. In Texas, roughly 40% of MOB inventory sits in the same ZIP code as a major hospital, and on-campus proximity carries about a 16% rent premium ($29/SF vs. $25/SF). Proximity to referral flow is the asset.

Underwrite the second generation. Ask what the space costs to re-fit for a different specialty, and who pays. That number decides the deal, not the going-in cap rate.

Diligence the credit, not the logo. Eighty-two percent employment means most rent sits behind system or corporate credit. Read the guarantee. Find out which entity actually signed.

Buy the escalator. Three percent contractual growth on a six-year term, in a market where nothing new can be built at a rent that clears, is a better inflation hedge than most things being marketed as one.

OTIMA invests in income-producing U.S. real estate — necessity retail, medical, and multifamily — and puts its own capital in every deal. We build and manage what we buy, which is how we price a re-tenanting honestly. If you'd like to talk through how medical fits an income portfolio, a principal will take the call.

Figures as of the dates cited; several metrics vary by data provider and are attributed inline where sources differ. This material is for informational purposes only and is not an offer to sell or a solicitation of an offer to buy any security. All investments involve risk, including possible loss of principal. Past performance does not predict future returns.