Medical Office Buildings Remain Resilient

The medical office subsector showed its recession-proof potential since the onset of the pandemic, with an increasing number of institutional investors and REITs focusing their efforts on one of the strongest-performing subsectors in the real estate industry. Medical office inventory continued to grow at a fast pace to accommodate demand fueled by demographic shifts, as more than 16 million square feet of properties under construction are set to include medical office space components, according to the latest CommercialEdge national office report. While most of these are rising on the campuses of hospitals or universities, investors are seizing the opportunities behind conversions of vacant suburban office buildings or redevelopment of obsolete medical facilities.

National average full-service equivalent listing rates averaged $38.62 per square foot as of January, up 1.2 percent year-over-year. The largest gains in office rents were recorded in Los Angeles ($41.62, up 8.1 percent year-over-year) and the Bay Area ($55.79, up 6.2 percent), followed by two South Florida markets: Tampa ($29.70, up 6.2 percent) and Miami ($43.43, up 5.8 percent).

National office vacancy clocked in at 15.7 percent in January, up 20 basis points from the month prior and 110 basis points year-over-year. At 13.4 percent, Miami had a vacancy rate below the national average, decreasing by 190 basis points since January 2021, largely due to an influx of financial firms and domestic in-migration.

Office-using employment increased by 4.4 percent year-over-year as of January, adding 113,000 new jobs. Despite the positive number, of the top 50 markets covered by CommercialEdge, only 24 have more office-using employees than in February 2020. Austin leads the way, with office-using employment growing 11.4 percent since pre-pandemic and adding 35,700 new office-using jobs throughout the last two years.

Some 150.5 million square feet of office space was under construction across the nation at the end of January, accounting for 2.2 percent of total inventory. Austin continues to have the country’s largest office pipeline relative to existing stock—10.3 percent—followed by Miami and Nashville, with a pipeline amounting to 8 percent of existing stock. Meanwhile, the nation experienced a strong January in terms of office transactions, with total volume nearing $5.9 billion. The amount included estimated unpublished and portfolio transactions, which were previously not included in this report.

Read the full CommercialEdge national office report.