Vital Signs: 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

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