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Your Investment Check-Up: Should You Bet on Medical Real Estate in 2025?

• David (Viacheslav) Davidenko

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The striking difference between vacancy rates—nearly 20% for traditional office buildings versus just 7% for medical facilities—reveals a compelling story about the resilience of healthcare real estate. This gap isn't accidental but reflects fundamental differences in how these properties function and the essential services they house.

Medical buildings aren't just boxes with rooms; they're highly specialized environments designed for healthcare delivery. From sophisticated ventilation systems preventing disease spread to specialized plumbing for medical gases, from wider hallways accommodating wheelchairs to lead-lined walls protecting from radiation—these properties embody purpose-built functionality that creates both stability and complexity. Once healthcare providers invest in customizing these spaces, they typically commit to decades-long tenancy, creating the stable, long-term leases investors prize.

The demographic tailwinds powering this sector are impossible to ignore. With 10,000 baby boomers turning 65 daily and healthcare spending projected to increase by 31% this decade, potentially approaching $2 trillion annually, the demand for medical facilities continues its upward trajectory. Even considering technological advances like telehealth, physical healthcare spaces remain essential for examinations, procedures, and treatments that can't be virtualized.

While higher development costs and regulatory complexities present challenges, the combination of recession-resistant demand, sticky tenants, prevalent triple-net leases, and powerful demographic trends makes medical real estate a compelling consideration for investors seeking stability in an uncertain world. The question becomes not just where to invest today, but how evolving healthcare delivery models might reshape medical real estate needs tomorrow.

Explore the fascinating intersection of healthcare and real estate with us. What other essential services might offer similar investment stability? We'd love to hear your thoughts!

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Speaker 1:

Okay, so you know how everyone's always talking about real estate and like which sectors are hot and which ones are you know yeah. Like they're always changing right. But I was looking at some stats recently and I saw something that kind of blew my mind. It said that by the end of last year, nearly 20% of office buildings in the US were vacant. Wow, I mean think about that. One out of every five office buildings just sitting there empty.

Speaker 2:

Yeah, that's a lot of empty space.

Speaker 1:

It is, and here's the really wild part. Medical office buildings had a vacancy rate of just over 7%.

Speaker 2:

That's a huge difference.

Speaker 1:

Right Like that's a massive gap and it really got me thinking what makes medical real estate so different?

Speaker 2:

It's definitely a unique sector, for sure.

Speaker 1:

So that's exactly what we're going to deep dive into today medical real estate.

Speaker 2:

Sounds good.

Speaker 1:

And we're not just talking about, like your typical doctor's office here. We're talking about everything from those small clinics to dental offices, outpatient surgery centers, all the way up to those massive hospital complexes the whole spectrum, exactly. And the thing is, these properties aren't just like any other building. They're specifically designed, and those massive hospital complexes, the whole spectrum Exactly. And the thing is, these properties aren't just like any other building. They're specifically designed and built for a very specific purpose delivering health care.

Speaker 2:

And that purpose brings with it a whole set of unique needs and requirements.

Speaker 1:

Oh, absolutely.

Speaker 2:

I mean you've got to think about things like specialized infrastructure that you just wouldn't find in a regular office. Yeah, For example, you need sophisticated ventilation systems that can prevent the spread of airborne illnesses.

Speaker 1:

Right Like way more intense than your average office AC.

Speaker 2:

Exactly. And then there's specialized plumbing to handle medical gases.

Speaker 1:

Oh yeah, Makes sense.

Speaker 2:

Wider hallways to accommodate patients in wheelchairs or on gurneys and medical equipment.

Speaker 1:

Oh right, I never thought about that.

Speaker 2:

Plus, you have to meet a ton of strict building codes that prioritize patient safety.

Speaker 1:

Yeah makes sense. It's a lot more than just four walls and a roof.

Speaker 2:

Oh for sure, it's a whole different ballgame.

Speaker 1:

So today we're going to break down what makes medical real estate so unique and why it's often seen as such a stable sector.

Speaker 2:

Yeah, we're going to explore the key characteristics that make it resilient.

Speaker 1:

And we'll also touch on some of the things you should think about if you're considering investing in this area.

Speaker 2:

Because it's not like just buying any other piece of property. There are some specific factors to keep in mind.

Speaker 1:

Exactly, yeah. So to kick things off, I guess the first question is what do you think is the biggest thing that sets medical real estate apart from other commercial properties?

Speaker 2:

Hmm, that's a good question.

Speaker 1:

You know like what really makes it stand out.

Speaker 2:

Well, to me, the most obvious difference is the nature of the services being provided.

Speaker 1:

Hmm.

Speaker 2:

Like we said, health care is essential.

Speaker 1:

Yeah, it's not like you can just choose not to go to the doctor if you need to.

Speaker 2:

Exactly.

Speaker 1:

It's not a luxury, it's a necessity, right it's?

Speaker 2:

not a luxury, it's a necessity Right, and that need doesn't go away, even when the economy takes a hit.

Speaker 1:

Yeah, you don't get sick less often just because there's a recession.

Speaker 2:

Exactly, and you know those vacancy rates we talked about at the beginning. They really highlight that point.

Speaker 1:

Oh yeah, for sure.

Speaker 2:

Medical office buildings stayed pretty full, while traditional offices struggled to find tenants.

Speaker 1:

Right and according to SoundryHealthcom.

Speaker 2:

That difference was significant. Yeah, it really shows how resilient the demand for health care space is.

Speaker 1:

Absolutely so. It's not just about consistent demand either. It's also about how long medical tenants tend to stay in one place.

Speaker 2:

Oh yeah, that's a big factor.

Speaker 1:

Once a practice sets up shop, they're usually there for the long haul.

Speaker 2:

Definitely. I mean think about how much goes into moving a medical practice. Oh my gosh.

Speaker 1:

It's a huge undertaking.

Speaker 2:

It's not like packing up a few desks and computers like you would with a regular office.

Speaker 1:

No way, you're talking about moving specialized equipment, exam rooms, all sorts of stuff.

Speaker 2:

Right. And then you've got to consider the patient base, which is often tied to a specific location.

Speaker 1:

Yeah, that makes sense. People are used to going to their doctor at a certain address.

Speaker 2:

So the logistics and costs of relocating something like an x-ray machine or a whole dental suite are pretty significant.

Speaker 1:

And that makes medical tenants much more likely to stay put once they're settled.

Speaker 2:

Exactly. They've invested a lot in their space, so they're less likely to up and move every few years.

Speaker 1:

And then there's the fact that these buildings themselves are super. We're talking about things like lead-lined walls for radiology departments, backup power systems to keep essential equipment running.

Speaker 2:

And let's not forget all the health and safety regulations they have to comply with.

Speaker 1:

Yeah, it's a whole other level of complexity compared to your average office building.

Speaker 2:

It is, and this specialization creates a kind of interesting dynamic, you know.

Speaker 1:

How so.

Speaker 2:

Well, on the one hand, it makes medical tenants even more likely to stay put.

Speaker 1:

OK, yeah, I can see that.

Speaker 2:

Because once they've invested in all those custom features exam rooms, ventilation labs it becomes a huge hassle to move and try to replicate that somewhere else.

Speaker 1:

Yeah, that.

Speaker 2:

So they're super incentivized to just renew their lease and stay where they are.

Speaker 1:

Right, that makes sense.

Speaker 2:

But on the flip side, if a medical tenant does leave, finding a new one can be a bit trickier.

Speaker 1:

That's interesting.

Speaker 2:

Yeah, because you can't easily repurpose a former surgery center into a store or a regular office without doing some major renovations.

Speaker 1:

Oh right, it's not like you can just slap on some fresh paint and call it a day.

Speaker 2:

Exactly so. There's a tradeoff there. The stability of having a long term medical tenant is great, but finding a replacement if they do leave can be more challenging.

Speaker 1:

So you need a more targeted approach to leasing in this sector, Exactly Now. We've talked about this a bit already, but it's worth emphasizing again the fact that medical real estate is often considered recession resistant.

Speaker 2:

Yes, that's a key advantage.

Speaker 1:

Because health care is such a fundamental need.

Speaker 2:

Right. People still need to see their doctor, fill their prescriptions, go to the hospital, even when the economy is struggling.

Speaker 1:

It's not like people just stop getting sick during a recession.

Speaker 2:

No, they don't, and that means that clinics, pharmacies, hospitals, they all tend to keep operating, even when other businesses are struggling.

Speaker 1:

And we saw this play out during the pandemic too.

Speaker 2:

Oh yeah, that was a great example.

Speaker 1:

Remember how a lot of traditional offices emptied out as people started working from home Right, but medical office space remained relatively stable.

Speaker 2:

It did, and I think it's also important to remember the rise of telehealth during that time.

Speaker 1:

Oh, yeah, telehealth really took off.

Speaker 2:

At one point, over half of all medical consultations were happening virtually.

Speaker 1:

That's wild 54% according to SoundrayHealthcom.

Speaker 2:

Yeah, but even with that huge shift towards virtual care by the end of 2022, we saw a strong return to in-person visits.

Speaker 1:

Like people were eager to get back to seeing their doctors face-to-face.

Speaker 2:

Exactly, and that just goes to show that, while technology can definitely play a role in healthcare, the need for physical spouses for exams, diagnoses, treatments, procedures that's not going away anytime soon.

Speaker 1:

Right, it's still crucial.

Speaker 2:

So all of this really points to the inherent stability of physical healthcare facilities.

Speaker 1:

And how that translates to a more resilient real estate sector. Absolutely Okay. So we've talked about what makes medical real estate different. Now let's dive into some of the advantages for investors who might be interested in this area.

Speaker 2:

Sounds good.

Speaker 1:

And the first one, which we've touched on already, is the prevalence of those long-term leases and how sticky medical tenants tend to be.

Speaker 2:

Yeah, that's a huge plus for investors.

Speaker 1:

Health care providers usually sign leases for 10, 15, sometimes even 20 years or more.

Speaker 2:

Help care providers usually sign leases for 10, 15, sometimes even 20 years or more Right, and that's because of all the investment they make in customizing their space, like we discussed.

Speaker 1:

Exactly. They're not looking to move every few years. They're looking for a long-term home.

Speaker 2:

And for an investor that kind of lease duration is gold.

Speaker 1:

It really is.

Speaker 2:

It means you can count on a consistent stream of rental income for a long time.

Speaker 1:

Exactly Predictable cash flow.

Speaker 2:

And you have much lower tenant turnover.

Speaker 1:

You're not constantly having to find new tenants, which saves a ton of time, money and hassle.

Speaker 2:

Right. So landlords often see medical offices as like the ideal tenants.

Speaker 1:

They're stable, reliable and they tend to stay put.

Speaker 2:

And then, on top of that, you've got the structure of triple net leases, which are super common in medical real estate.

Speaker 1:

NNN leases right. Could you break down how those work for us?

Speaker 2:

Sure. So, in a nutshell, with a triple net lease, the tenant is responsible for most of the property's operating expenses.

Speaker 1:

Okay.

Speaker 2:

Things like property taxes, building insurance, maintenance and repairs.

Speaker 1:

So the landlord doesn't have to worry about those costs.

Speaker 2:

That's the idea.

Speaker 1:

So how does that benefit the landlord?

Speaker 2:

Well, it basically simplifies their income stream.

Speaker 1:

Okay.

Speaker 2:

They get their rent payment and they don't have to worry about deducting all those expenses.

Speaker 1:

So it's a more predictable and passive income.

Speaker 2:

Exactly, and they also don't have to deal with the day-to-day headaches of managing the property.

Speaker 1:

Like they're not getting calls about a leaky faucet or a broken HVAC.

Speaker 2:

Right. All of that falls on the tenant.

Speaker 1:

So it's a much more hands-off investment compared to other types of commercial real estate.

Speaker 2:

Definitely.

Speaker 1:

Now, another factor that's working in favor of medical real estate is demographics.

Speaker 2:

Ah yes, the population trends.

Speaker 1:

And specifically the aging of the population.

Speaker 2:

That's right. We've got a big wave of baby boomers reaching retirement age 10,000 every single day. Yeah, and as people get older, they generally need more health care services.

Speaker 1:

Makes sense. You know more doctor's appointments, more procedures, all that.

Speaker 2:

By 2030, the entire baby boomer generation will be at least 65 years old. Wow, and projections show that outpatient health care spending by seniors is going to increase by around 31 percent during this decade.

Speaker 1:

That's a big jump.

Speaker 2:

It could reach almost two trillion dollars annually.

Speaker 1:

Wow. So if we connect those demographic shifts back to real estate, it's pretty clear that we're going to need more medical facilities.

Speaker 2:

Exactly as the senior population grows, the demand for health care space will grow along with it.

Speaker 1:

So from an investment perspective, the aging population is a really positive sign for medical real estate.

Speaker 2:

It suggests continued and potentially even increasing demand in the years to come.

Speaker 1:

Now, of course, it's important to be realistic. Of course, medical real estate isn't a guaranteed win. There are risks and challenges to consider, just like with any investment. Absolutely so what are some of the potential downsides or things that investors need to be aware of?

Speaker 2:

Well, one of the main challenges is the cost.

Speaker 1:

Okay.

Speaker 2:

Both the initial investment to acquire or develop a medical property and the ongoing costs for maintenance tend to be higher than with more traditional commercial properties. That makes sense, and a lot of that has to do with the specialized nature of these buildings that we talked about earlier.

Speaker 1:

Right All those custom features and systems.

Speaker 2:

Exactly, you know, constructing or retrofitting a property for medical use offy means you need things like advanced HVAC systems with really specific air filtration standards.

Speaker 1:

Okay.

Speaker 2:

Reliable backup generators to keep things running in case of a power outage.

Speaker 1:

Oh yeah, Critical for medical equipment.

Speaker 2:

And specialized plumbing for medical gases. All of that adds up.

Speaker 1:

So the upfront investment can be pretty steep.

Speaker 2:

It can. And then you have to factor in the ongoing maintenance costs too. Keeping all that specialized equipment in top shape is not cheap.

Speaker 1:

Yeah, it's not like maintaining a typical office building.

Speaker 2:

So think about something like an outpatient surgery center.

Speaker 1:

OK, typical office building.

Speaker 2:

So think about something like an outpatient surgery center. Okay, you need to equip it with operating rooms, sterilization equipment, recovery areas, all that stuff, and that's expensive.

Speaker 1:

Plus, there's the whole regulatory approval process, which can be lengthy and complex.

Speaker 2:

Right. So the upfront costs are significant. And then you have the ongoing maintenance of all that equipment, plus servicing the high-tech machinery, and that all contributes to higher operating costs over time.

Speaker 1:

So the financial barrier to entry is higher with medical real estate.

Speaker 2:

Yeah, it's something to keep in mind.

Speaker 1:

And then there's the whole regulatory and compliance side of things.

Speaker 2:

Ah yes, the ever-changing world of health care regulations.

Speaker 1:

The health care industry is heavily regulated at both the federal and local levels.

Speaker 2:

And those regulations have a huge impact on the physical properties where health care is delivered.

Speaker 1:

Right. So medical properties have to meet all sorts of standards for health, safety and accessibility.

Speaker 2:

We're talking about patient privacy regulations, building things specifically for health care facilities.

Speaker 1:

It's a lot to keep track of.

Speaker 2:

It is, and the thing is, these regulations are constantly evolving.

Speaker 1:

Oh great. So it's not like you can just learn the rules once and be done with it?

Speaker 2:

No, you have to stay on top of any changes.

Speaker 1:

Because if health care laws change or new safety standards come out, you might have to make costly upgrades to your property to stay compliant.

Speaker 2:

Exactly, you might need to widen doorways for accessibility, upgrade ventilation systems, even modify the layout of the building.

Speaker 1:

So there's always the potential for unexpected costs.

Speaker 2:

Right, and failure to keep up with those regulations can have serious consequences.

Speaker 1:

Yeah, like you could lose your tenants or even be forced to shut down.

Speaker 2:

So due diligence is absolutely essential in this sector.

Speaker 1:

You really need to do your homework, not just on the physical property itself, but also on the regulatory environment.

Speaker 2:

And you have to stay informed about any changes to health care laws and how they might affect your property.

Speaker 1:

So it's a more demanding sector in terms of staying on top of things.

Speaker 2:

It is, but it can also be very rewarding.

Speaker 1:

So let's sum up everything we've talked about for our listeners.

Speaker 2:

Good idea.

Speaker 1:

Medical real estate is a really unique sector.

Speaker 2:

It's tied directly to a fundamental need health care services.

Speaker 1:

And that gives it a certain level of stability and potential for long-term returns that you don't always see in other areas of real estate.

Speaker 2:

The demand for health care is resilient.

Speaker 1:

Plus, you often get those long-term leases with reliable tenants.

Speaker 2:

And the demographic trends with the aging population are pointing towards continued growth in the need for health care services.

Speaker 1:

So it's definitely a compelling investment for a lot of people.

Speaker 2:

But we also have to acknowledge that it comes with its own complexities.

Speaker 1:

The higher costs the regulations. It's not something you can jump into without doing your research.

Speaker 2:

You need to understand the nuances of both the real estate market and the health care industry.

Speaker 1:

So, as you think about all this, here's a final thought to leave you with how is the way we deliver health care changing?

Speaker 2:

Oh, that's a great question.

Speaker 1:

Like with all the advancements in technology, new models of care. What does that mean for the future of medical real estate?

Speaker 2:

Yeah, will we need different types of spaces?

Speaker 1:

Will the demand shift in certain areas?

Speaker 2:

Will telehealth change the game even more?

Speaker 1:

It's fascinating to think about how our needs as a society directly influence how and where we invest.

Speaker 2:

And it makes you wonder what other industries that provide essential services might offer similar opportunities.

Speaker 1:

It's definitely a sector worth keeping an eye on and exploring further.

Speaker 2:

I agree there's a lot to discover at the intersection of healthcare and real estate.

Speaker 1:

Thanks for joining us on this deep dive into medical real estate.

Speaker 2:

It's been a pleasure.

Speaker 1:

We'll see you next time.

Speaker 2:

Take care Bye.

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David (Viacheslav) Davidenko

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