Taking the “O” out of MOBs: The Argument for Medical Office as Separate Asset Class

April 10, 2024

Medical office buildings (MOBs) are a niche investment and healthcare real estate investors understand their value proposition. They have “sticky” tenancy, require specialized buildouts, and are considered a risk-averse investment. They may look like office buildings from the outside, but they are completely different in their internal structure, function, and performance.

Yet, many healthcare real estate experts are often faced with lenders who are unable to finance an MOB or institutional investors passing on an MOB because they “aren’t lending on office properties right now” or their “office bucket is full.”

These conversations leave many of us in healthcare real estate shaking our heads. Medical Office Buildings may have the word “office” in their name, but that’s where the similarities end.


Quality MOBs are purpose-built for clinical use. At a minimum, they require high ceilings for additional plumbing, a higher electrical capacity, gurney-sized elevators for easy patient transfers, and covered drop-offs/entrances with automatic doors for easier patient access. Medical fields such as surgery, imaging, lab, and rehabilitation require further specialized buildout, such as reinforced floors, radio frequency shielding, generators, and refrigeration.


The ideal location for an MOB differs from that of an office property. While prime office real estate is generally located within the Central Business District of the top 25 Metropolitan Statistical Areas in the U.S., MOB performance is linked with either proximity to a hospital or a location within a highly insured yet medically underserved market.


MOB tenants typically sign long-term leases and have higher renewal probabilities compared to office tenants. MOBs tend to command higher rents and have higher occupancy. Plus, medical professionals are among the most creditworthy tenants with the lowest default rates.


According to Moody’s Analytics, the national office vacancy rate rose to a record-breaking 19.6 percent in the fourth quarter of 2023, the largest quarterly increase since the first quarter of 2021. Pre-pandemic, the average office vacancy rate was approximately 16.8 percent. Unfortunately, office demand shows no sign of improving. While the number of full-time remote employees has decreased, hybrid workplace policies are becoming the norm. In the fourth quarter, 62 percent of U.S. businesses allowed employees to work from home some days of the week, which is up from 51 percent in the first quarter, according to Scoop Technologies. However, over that same period, medical office buildings have far outperformed not just office properties, but almost every other sector.

MOBs have long been thought of as recession-resilient assets. In general, recessions lead to jobs losses (affecting office properties), reductions in consumer demand (affecting retail properties), a reduced need for new housing (affecting multifamily properties), and higher inventories resulting in a slowdown of manufacturing (affecting industrial properties). Whatever changes the economy brings, one thing it does not affect is the need for healthcare.

In fact, healthcare spending continues to increase year over year. One of the biggest reasons for this is the aging baby boomer population, otherwise known as the “Silver Tsunami.”

According to the U.S. Census, the number of Americans ages 65 and older is projected to increase from 58 million in 2022 to 82 million by 2050 (a 47 percent increase). The 65-and-older age group’s share of the total population is projected to rise from 17 percent to 23 percent. With the baby boomer population requiring nearly six times more medical visits than millennials, the healthcare market is witnessing unprecedented growth.

While demand for medical space continues to increase, oversupply has never been a concern as speculative development is rare. As a result, inventory increases at a pace driven by tenant demand. The majority of new-build medical offices are either purpose built for a health system or physician group, or at least 60 percent pre-leased.

During the pandemic, healthcare real estate had the lowest default rate and least amount of rent deferrals compared to other property types. According to RevistaMed, average triple net rent is up over 10 percent through Q4 2023 since the Covid-19 shutdowns, while occupancy has steadily climbed. Furthermore, occupancy remained steady in 2020, proving that MOBs are pandemic resistant as well.

With such drastic differences in performance, purpose, and physical structure, classifying MOBs as “office” is not only inaccurate but a detriment to property portfolios. Perhaps MOBs are due for a name change. Medical Outpatient Buildings, anyone?

Connect with one of our trusted medical & life sciences advisors today.