President John Adams once said, “Facts are a stubborn thing.” The facts of changing demographics are equally undeniable, especially in real estate. The aging baby boomer generation is significantly impacting medical care and healthcare facilities nationwide. In the next five years, more than 9 million Americans will turn 65, driving up demand for healthcare services across all disciplines. To meet this need, the economy will require 150,000 new healthcare practitioners over the next two years. These practitioners will need medical office spaces.

Rising Demand for Medical Office Buildings

Healthcare organizations and institutional investors have recognized these shifts and invested heavily in medical office buildings (MOBs) over the past eight years. After a downturn from 2010-2012, absorption of medical office space has consistently outpaced supply, dropping the national vacancy rate to just 7.6%. However, higher capital costs have slowed traditional medical REIT acquisitions, opening opportunities for other investors.

Once considered a niche, medical office real estate is now viewed as a core asset class.

Healthcare Delivery Innovation

Medical research and technology breakthroughs have expanded healthcare procedures, affecting the facilities that house them. More private surgery centers, specialty practices, and large physician groups are moving from expensive hospital campuses to suburban MOBs and off-campus alternatives. This shift is reshaping the medical office market, fueling the “retailization” trend, where medical services occupy lower-cost retail and commercial spaces near patient bases. Urgent care, dialysis centers, and primary care clinics are increasingly common in retail centers and MOBs.

Given these changes, we expect MOB vacancy rates to continue declining, with upward pressure on lease rates. Due to high barriers to entry, supply will likely fall short of demand.

Local Impact: San Diego’s Medical Office Market

San Diego reflects national trends in its medical office market. The region leads in biotechnology, genetics, and medical device innovation. Collaboration with five nationally recognized healthcare organizations has raised care standards and increased demand for clinical space across submarkets.

In 2017 and 2018, San Diego saw over 100,000 SF in net absorption, reducing the MOB vacancy rate to 6.1%. While the region already has 12 million SF of medical office space, it needs more to accommodate its growing population. With a population projected to reach 4 million in 30 years, and an aging 65+ population increasing by 18,000 annually, demand will rise. However, planned multi-tenant MOB developments will fall short of the estimated 100,000+ SF in annual absorption.

The Outlook for MOB Investments

Cap rates for MOB investments remain low—around 6%—indicating long-term stability and desirability. Medical office leases continue to provide value as demand and lease rates rise. Despite changes in healthcare delivery and public policy, San Diego’s medical office real estate remains a strong investment.

Conclusion: A Positive Trend for Investors

This demographic shift represents a positive trend for the region and for the medical office sector. At Intersection, we track trends that impact our investors and owners. As available land becomes scarcer and medical office vacancies decrease, we seek opportunities in areas that historically wouldn’t have supported medical use. Although challenging, we are committed to identifying these opportunities wherever possible.