Vital Signs: 2025 Healthcare Update

2025 HEALTHCARE UPDATE

HEALTHCARE UPDATE

Introduction

The healthcare sector continues to face headwinds that may impact future asset performance. Despite these challenges, 2024 has been a strong year for the healthcare commercial real estate sector. Occupancy rates are up, construction is subdued, absorption is strong, and transaction activity grew. The underlying demographic drivers behind the growth in healthcare continue to accelerate. An aging population with a growing prevalence of chronic conditions is driving increased demand for specialized services and higher spending. As patient needs evolve, so does the healthcare sector. • Physician shortages continue to accelerate due to increased retirements and a limited pool of new talent. This care provider shortage has the potential to impact the future growth of the medical outpatient (MOB) sector. • Absorption has been strong in 2024 as the occupancy rate increased, reaching a new cyclical high of 92.8%. With construction activity subdued, occupancy rates are likely to increase even more in 2025. • Transaction activity ticked up in the first three quarters of 2024, up 62% over 2023. Portfolio sales activity also increased, growing 54% over the same period last year. Cap rates posted some compression in the third quarter as more investors priced deals with the expectation that interest rates will continue to decline. • Moderating inflation has slowed expense growth, but it has also tempered revenue, resulting in lower NOI over the past four quarters. A careful rebalancing of expenses is required for NOI to return to pre-pandemic trends. Key Takeaways

2

GROWTH DRIVERS

Healthcare Spending Accelerates Healthcare spending is forecast to grow 5.6% annually through 2032.

GROWTH DRIVERS

• National healthcare spending has grown 4.8% annually over the last 10 years. • Inflationary pressures have impacted healthcare expenditures. Spending is expected to accelerate to 5.6% annually through 2032. • Spending in 2023 was 7.5% stronger year-over-year (YOY), as higher inflation impacted costs. A disinflationary environment is expected to moderate cost increases in 2025, though a robust 5.2% YOY increase is still forecast. • An aging population continues to garner a larger share of national healthcare spending. As of 2020, 37% of total

$8,000

Healthcare Spending Share 65+ Age Cohort

38%

$7,000

37%

36%

35%

35%

$6,000

34%

35% 34%

34% 34%

34% 34%

34%

32%

$5,000

30%

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

$4,000

healthcare spending, including government and personal, was allocated to the 65+ age cohort.

$3,000

• The 65+ age group is expected to increase significantly through 2032, growing by 20%, while the national population is expected to grow just 5% during the same period. This increase will require additional services and facilities focused on caring for this older population.

$2,000

$1,000

National Healthcare Spending (in $Millions)

$0

2011

2017

2012

2021

2013

2015

2031

2018

2016

2019

2014

2001

2010

2027

2022

2025

2023

2032

2028

2026

2029

2024

2007

2002

2020

2003

2005

2030

2008

2006

2009

2004

2000

Forecast

HC Spend

Source: Centers for Medicare & Medicaid Services (CMS), Cushman & Wakefield Research

4

Robust Growth in Outpatient Services Growth in all outpatient services will total 11% in the next five years.

GROWTH DRIVERS

• Outpatient endocrinology services, particularly those focused on diabetes, glucose monitoring and diabetes management, are expected to experience the highest growth over the next five years. As the population ages, the prevalence of diabetes — driven by sedentary lifestyles and unhealthy diets — is projected to increase significantly, increasing demand for these services. Additionally, high obesity rates in the U.S. continue to drive demand for endocrinology services 1 . However, the rise of GLP-1 (glucagon-like peptide 1) medications could reduce long-term needs as expanded Medicaid and Medicare coverage 2 makes these treatments accessible to a broader population. • The growing focus on mental health and wellness is expected to increase the need for additional outpatient psychiatry services. However, the widespread adoption Obstetrics services are expected to decline further over the next five years, driven by rising insurance premiums, low reimbursement rates, fewer medical students specializing in obstetrics and a declining national birth rate. Gaps in obstetric outpatient services will significantly impact rural communities as many rural hospitals discontinue their obstetrics services. 1. https://www.nytimes.com/2024/11/14/well/obesity-epidemic america.html 2. https://www.bloomberg.com/news/articles/2024-11-26/biden proposes-medicare-and-medicaid-coverage-of-obesity drugs?srnd=homepage-americas of telehealth by behavioral health practitioners is reshaping the overall footprint of this service line.

Five-Year Growth (2023-2028) Top 10

Endocrinology

25.3%

Psychiatry

19.0%

Spine

17.0%

Vascular

14.8%

Physical Therapy/Rehabilitation

14.8%

Cardiology

13.8%

Ophthalmology

13.7%

Orthopedics

12.4%

ENT

12.3%

Lab

12.3%

All Services

11.0%

Pulmonology

-0.6%

Obstetrics

-8.2%

-15%

-5%

5%

15%

25%

35%

Source: Advisory Board, Cushman & Wakefield Research

5

Employment Outpaces New Inventory Quarterly construction completions lag robust employment growth.

GROWTH DRIVERS

• Quarterly employment growth has outpaced medical outpatient building (MOB) construction in the last five years, despite the dip in employment at the peak of the pandemic in 2020. Post-pandemic employment growth has been robust and has averaged 3.0% across major medical sectors in the last three years, nearly three times the pace of MOB deliveries. • Hospitals posted a slight downtick in YOY employment growth in the third quarter. However, nearly 225,000 new jobs were added over the past 12 months, significantly outpacing the average 129,000 jobs added annually over the last three years. employment growth in the third quarter, adding 105,000 new jobs — still exceeding the three-year annual average of 99,000. • Outpatient care centers posted an increase in YOY employment growth in the third quarter, with 34,000 new jobs added, outpacing the three-year annual average of 30,000. • As the MOB construction pipeline continues to decrease, robust employment growth will result in additional absorption and occupancy increases, likely increasing demand for new MOB construction. • Similarly, physician offices experienced slower YOY

10%

8%

6%

4%

2%

0%

-2%

-4%

-6%

-8%

2017Q1

2021Q1

2018Q1

2016Q1

2019Q1

2017Q2

2021Q2

2022Q1

2017Q3

2021Q3

2023Q1

2018Q2

2018Q3

2016Q2

2019Q2

2016Q3

2019Q3

2017Q4

2021Q4

2024Q1

2018Q4

2020Q1

2016Q4

2019Q4

2022Q2

2022Q3

2023Q2

2023Q3

2022Q4

2024Q2

2023Q4

2024Q3

2020Q2

2020Q3

2020Q4

MOB Volume Growth Offices of Physicians

Hospitals

Outpatient Care Centers

Source: Revista Med, Moody’s Analytics, BLS, Cushman & Wakefield Research

6

MEDICAL OUTPATIENT LEASING

Robust Demand for Medical Outpatient Increased occupancy and strong absorption in 2024

MOB LEASING

• Leasing activity was strong across both on- and off campus medical outpatient assets, pushing the occupancy rate higher as of the third quarter. The market occupancy rate has increased 53 basis points (bps) over the last four quarters and currently stands at 92.8%, a cyclical high. • Absorption of medical outpatient space continues at a robust pace. Third-quarter absorption was slightly slower on a quarter-over-quarter (QOQ) basis but was 42% stronger than absorption during the third quarter of 2023. Absorption over the last 12 months totaled 16 million square feet (msf), up 25% over the previous 12-month period (Q4 2022 - Q3 2023). • Quarterly completions of new space averaged about 3.1 msf per quarter over the last five years. Completions of 3.1 msf in the third quarter of 2024 were directly in line with this quarterly average. On a 12-month basis, completions totaled 12.4 msf through the third quarter. This pace of deliveries was 21% higher than completions in the previous 12-month period (Q4 2022 - Q3 2023). Another 14.7 msf of new construction is expected to be delivered in the next 12 months. Many of these projects were planned during the peak pandemic years of 2020-2021.

7

93%

6

5

92%

4

3

91%

2

Million Square Feet

1

0

90%

2021 Q1

2019 Q1

2021 Q2

2022 Q1

2021 Q3

2023 Q1

2019 Q2

2019 Q3

2021 Q4

2024 Q1

2020 Q1

2019 Q4

2022 Q2

2022 Q3

2023 Q2

2023 Q3

2022 Q4

2024 Q2

2023 Q4

2024 Q3

2020 Q2

2020 Q3

2020 Q4

Completed SF (LHS)

Absorption SF (LHS)

Occupancy Rate (RHS)

Source: Revista Med (based on Top 50 Markets, 7,500+ sf MOBs), Cushman & Wakefield Research

8

Rent Growth Averaged 2% YOY Top 10 metros by inventory

MOB LEASING

• Triple net rents (NNN) averaged $25.25 per square foot (psf) across the top 50 metros, up 2% YOY. The vacancy rate averaged 7.5%, down 45 bps YOY. • Boston recorded the lowest vacancy rate among the top 10 metros, at 5.7% as of the third quarter of 2024, reflecting a compression of 87 bps YOY. Boston’s rent growth was stronger than the top 50 average, growing 3.2% YOY. With just over 240,000 sf of new inventory under construction, the Boston metro will face supply constraints in the near term. • Miami’s rent growth of 3.4% YOY was the strongest among the top 10 markets, with a low vacancy rate of

$42

12%

$36

10%

$30

8%

$24

6%

$18

4%

6.1%, down 36 bps YOY. Miami ranks second in construction activity, with 1.7 msf currently under construction.

$12 NNN Rent PSF

2%

$6

$27.73 $29.76 $27.06 $22.92 $25.25 $36.23 $23.17 $23.49 $26.66 $25.03 $23.35 0%

$0

NNN Rent

YOY Rent Growth (RHS)

Vacancy (RHS)

Source: Revista Med (based on Top 50 Markets, 7,500+ sf MOBs), Cushman & Wakefield Research

9

Construction Activity Trends Down New starts are at a cyclical low.

MOB LEASING

• New medical outpatient building construction has slowed significantly from recent highs. As of the third quarter, inventory under construction as a percentage of total inventory is 2.4%, totaling nearly 21 msf. This activity is down from a year ago when it totaled 3.0%, or 26 msf, during the third quarter of 2023. This activity is also below the recent high of 3.1% and lower still than the prior cycle high of 3.7%. • New starts have trended lower in 2024, totaling just 1.5 msf in the third quarter. This quarterly activity was down 10% QOQ and 20% lower than the third quarter of 2023. • Declining construction activity gives the market some time to absorb existing new product. However, with low vacancy rates, additional new deliveries will be needed to address the demand. Increased costs, coupled with a high-interest-rate environment has dampened some construction activity. However, with expectations of declining interest rates, additional projects may be given the green light.

30

4.0%

27

3.5%

24

3.0%

MSF

21

2.5%

18

2.0%

15

1.5%

2017 Q1

2021 Q1

2018 Q1

2016 Q1

2019 Q1

2017 Q2

2021 Q2

2022 Q1

2017 Q3

2021 Q3

2023 Q1

2018 Q2

2018 Q3

2016 Q2

2019 Q2

2016 Q3

2019 Q3

2017 Q4

2021 Q4

2024 Q1

2018 Q4

2020 Q1

2016 Q4

2019 Q4

2022 Q2

2022 Q3

2023 Q2

2023 Q3

2022 Q4

2024 Q2

2023 Q4

2024 Q3

2020 Q2

2020 Q3

2020 Q4

Under Construction

UC as % of Inventory (RHS)

Source: Revista Med (based on Top 50 Markets, 7,500+ sf MOBs), Cushman & Wakefield Research

10

Construction Costs Moderate However, costs remain elevated when compared to pre pandemic levels.

MOB LEASING

• A hurdle to construction is the increased cost of building. Driven by strong demand and inflationary pressures, construction costs rose significantly between 2021 and 2023. • While prices have slowed compared to a few years ago, they remain significantly higher than pre-pandemic levels. As of October 2024, the cost to build healthcare buildings rose just 0.1% YOY, but costs were up 34% compared to January 2020. levels. Total nonresidential construction outpaced healthcare costs, up 1.3% YOY and up 38% when compared to January 2020. • Planning construction projects in a high-inflation, high interest-rate environment has been challenging. With inflation closer to the Fed’s target and interest rates beginning to ease, more developers expect increased activity in 2025. However, potentially higher commodity and labor costs may dampen some activity. • Conversions are another option for healthcare construction. The repositioning of office assets has accelerated in recent years, with partial or full conversions of office space to MOBs becoming more common. This trend may accelerate in 2025 as more office assets may face distress; however, the cost to convert will require tactical planning to meet strategic goals.

180

170

160

150

Up 34%

140

130

120

New Construction PPI (Index NSA)

110

100

Jan-17

Jan-21

Jan-18

Jan-16

Jan-19

Sep-17

Sep-21

Sep-18

Sep-16

Sep-19

Jan-22

Jan-23

May-17

May-21

Jan-24

May-18

May-16

May-19

Jan-20

Sep-22

Sep-23

Sep-24

Sep-20

May-22

May-23

May-24

May-20

Health Care

Nonresidential

Source: U.S. Bureau of Labor Statistics (BLS)

11

Disinflationary Impact on Expenses NOI slowed through 2024.

MOB LEASING

• Decreasing inflation has resulted in a deceleration of expense growth through 2024. As of the third quarter, expense growth has slowed to 2.2% YOY, less than half the 5.5% posted a year ago during the third quarter of 2023. This reading is closer to the pre-pandemic, five year average of 1.6% for the period between 2015 to 2019. • Revenue growth is also feeling the impact of disinflation, as growth has decelerated from 2023 highs. Revenue growth of 2.3% YOY in the third quarter has fallen from its recent peak level of 3.7% YOY during the third quarter of 2023. Removing inflationary volatility, third quarter revenue growth is still slightly higher than the five-year average of 2.2% for the pre-pandemic period of 2015 to 2019. • Correspondingly, NOI growth has also decelerated, posting 2.2% YOY in the third quarter. This rate falls below the 2.6% average for the five-year, pre-pandemic period, indicating that expense management needs to accelerate to bring NOI closer to long-term averages. However, increasing labor costs continue to apply upward pressure on expenses, which makes this rebalance challenging.

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

Same Store Year-Over-Year Growth

0.0%

NOI Growth

Revenue Growth

Expense Growth

Source: Revista Med, Cushman & Wakefield Research

12

MOB CAPITAL MARKETS

2024 Transaction Volume Up 62% YOY Sales activity remains subdued relative to 2022 peak levels.

CAPITAL MARKETS

• Investment activity for both on- and off-campus sales totaled $6.7 billion for the first three quarters of 2024, up 62% YOY for the same period in 2023. • On-campus sales totaled $1.8 billion through the first three quarters, more than double the sales activity from the same period last year. Third-quarter pricing was up 2.4% QOQ but flat YOY. • Off-campus sales volume totaled $4.9 billion for the first three quarters of 2024, up 39% from the same period last year. Pricing was up 6.4% QOQ and up 0.4% on a YOY basis. • High interest rates, which kept sales activity muted, are expected to continue to drop in 2025, as the recent 75 bp cut has improved sentiment. Declining interest rates are expected to improve liquidity in the market and result in increased transaction activity in 2025.

$6

$450

$5

$400

$4

$350

$3

$300

Billions

$2

$250

Price Per Square Foot

$1

$200

$0

$150

On-Campus Sales Volume

Off-Campus Sales Volume

On-Campus Price PSF (TTM)

Off-Campus Price PSF (TTM)

Source: Revista Med (based on Top 50 Markets, 7,500+ sf MOBs), Cushman & Wakefield Research

14

Portfolios Outpace Single Asset Sales

CAPITAL MARKETS

• Excluding mergers, portfolio sales are outpacing single asset sales. Portfolio deal volume totaled $3.1 billion through the third quarter of 2024, up 54% from the same period in 2023. Significant portfolio transactions include the Unity Medical Properties purchase of nearly 50 HealthPeak properties for over $674 million in the third quarter. • Single asset sales totaled $2.9 billion through the third quarter of 2024, nearly half the volume from the same period in 2023. One example is the sale leaseback of OrthoNebraska’s specialty hospital asset for $39.5 million in October 2024.

$8

$7

$6

$5

$4

$3

Billions

$2

$1

$0

Single Asset

Portfolio

Source: RevistaMed, Cushman & Wakefield Research

15

Cap Rate Compression in 2024 Pricing may have peaked in Q1.

CAPITAL MARKETS

• After a six-quarter run-up on capitalization rates, 2024 third-quarter cap rates have begun to compress. The third-quarter cap rate of 7.4% is 10 bps lower on a QOQ basis. However, this pricing is still 80 bps higher than a year ago. • The MOB cap rate spread to 10-year Treasurys pushed higher in 2024, outpacing the office sector, primarily due to decreased activity in office markets. • Expectations of lower interest rates in 2025 will likely result in an influx of capital to the sector. Lenders and investors who sat on the sidelines during the period of high interest rates are expected to reenter the market in 2025.

8%

700

7%

600

6%

500

5%

400

4%

300

Cap Rate

Spread (Bps)

3%

200

2%

100

1%

0

MOB Spread (RHS)

Office Spread (RHS)

MOB Average Cap Rate (TTM)

Source: Revista Med (based on Top 50 Markets, 7,500+ sf MOBs), Cushman & Wakefield Research

16

HEALTHCARE UPDATE

Conclusion

The healthcare commercial real estate market will experience continued growth in 2025 as the industry deals with market trends impacting leasing and transaction activity. • High occupancy rates means that opportunities for occupier growth within the existing inventory will be constrained across some markets. • Supply constraints may increase the viability of targeted conversions of office or other assets to healthcare assets; however, increased construction costs means that strategic planning is essential. • Lower interest rates are expected to increase capital availability in the sector, allowing some companies to refinance existing debt, providing more liquidity. However, rate cuts by the Fed are expected to be limited in 2025, keeping rates within 100 bps of current rates. • Transaction activity in 2025 is expected to increase as more investors look to take advantage of the growth potential in the sector.

17

Contacts

Lorie Damon Executive Managing Director Healthcare Advisory Practice lorie.damon@cushwake.com Sandy Romero Head of Life Sciences & Healthcare Insights sandy.somero@cushwake.com

Gino Lollio Executive Director CM Investment Sales gino.lollio@cushwake.com Travis Ives Executive Director CM Investment Sales travis.ives@cushwake.com

About Cushman & Wakefield Cushman & Wakefield (NYSE: CWK) is a leading global commercial real estate services firm for property owners and occupiers with approximately 52,000 employees in nearly 400 offices and 60 countries. In 2023, the firm reported revenue of $9.5 billion across its core services of property, facilities and project management, leasing, capital markets, and valuation and other services. It also receives numerous industry and business accolades for its award-winning culture and commitment to Diversity, Equity and Inclusion (DEI), sustainability and more. For additional information, visit www.cushmanwakefield.com.