Medical Office Building and Clinic Feasibility Study

Medical office is the tightest segment of the office market, and that is exactly why a national figure does not underwrite a building. JLL reports record medical outpatient occupancy of 92.7 percent at the end of 2025. Transwestern reports 5.8 percent vacancy in the first quarter of 2026 for buildings of 10,000 square feet and larger. Those two figures measure different building sets and cannot be converted into each other. What decides SBA, USDA and bank credit is local physician need, a rent that holds up as fair market value under the Stark rules, specialized buildout that the appraisal may discount, and the program rules on occupancy, equity and feasibility studies. A medical office feasibility study from MMCG Invest documents each of those for the credit file.

A dental or physician practice buying or building its own office under SBA 504 or 7(a), usually through an Eligible Passive Company that leases to the practice. A developer or health system building a multi-tenant medical office building, on campus or off, for a construction lender. A nonprofit or public body building or buying a rural health clinic or FQHC with USDA Community Facilities funds. A for-profit clinic or a rural MOB owner seeking a USDA Business and Industry guarantee. A lender that needs an independent opinion before a credit committee.

Each provider below measures a different universe. The study cites each figure to its own source and never blends them into a single national rate.

Two readings follow. Supply is the strongest argument a study can make, because starts near 1 percent of inventory and pre-leasing near 88 percent mean little speculative product competes with a justified building. The rent gap cuts the other way: a new building must achieve rents well above the mid-$20s market average to work, so the study has to show that tenants in the subject's market will pay them.

None of the providers above publishes non-metro medical office vacancy or rents. Transwestern notes high single-digit rent growth in tight secondary markets. For a rural subject the study builds local comparables from primary leasing data rather than borrowing a metro figure.

For general office context, CoStar's Office National Report dated October 4, 2026 shows Education and Health Services employment growing 1.87 percent against total employment growth of 0.43 percent, the fastest-growing office-using sector in the report.

Physician supply. HRSA's National Center for Health Workforce Analysis projected in December 2025 a shortage of 141,160 full-time equivalent physicians in 2038. The same projections put nonmetro physician supply at 42 percent of demand in 2038, against 95 percent in metro areas. The specialties with the lowest projected supply adequacy are vascular surgery (66 percent), ophthalmology (72 percent), thoracic surgery (73 percent), plastic surgery (74 percent) and family medicine (76 percent). HRSA's earlier 2022 to 2037 series is superseded and the study does not cite it. The AAMC's 2024 report projects a total shortage of 13,500 to 86,000 physicians by 2036. HRSA uses a population-to-primary-care-physician ratio of 3,500 to 1 for Health Professional Shortage Area designation.

Dentists. HHS projects that by 2037 demand will require 41,000 more dentists and dental hygienists, with a 46 percent dentist shortage projected in nonmetro areas (NACHC policy paper, January 2026, citing HHS).

Outpatient migration. The CY 2026 OPPS and ASC final rule (CMS-1834-FC, released November 21, 2025) sets a 2.6 percent payment update and begins a three-year phase-out of the inpatient-only list, starting with the removal of 285 mostly musculoskeletal procedures for 2026. The CMS fact sheet reports 560 codes added to the ASC covered procedures list: 289 under revised criteria and 271 removed from the inpatient-only list. Procedures that move to the ambulatory setting create demand for the clinic and surgery space that MOBs house.

Health system strategy. JLL's finding that health systems signed 46 percent of tracked 2025 leases and delivered 57 percent of 2025 space means that in most markets the health system is both the largest tenant and the largest competitor. A study for an independent MOB identifies the system's ambulatory strategy in the subject's trade area and the sites it controls.

Demand ratios. The ratios that circulate for medical office, square feet per capita, square feet per resident aged 65 and over, square feet per ambulatory healthcare employee, reached this research only through secondary sites without a publication year, and MGMA's square feet per provider by specialty sits behind its DataDive paywall. The study treats them as methodology, not as citable benchmarks. Demand for the subject is derived from the trade area's physician supply and need by specialty (HRSA Area Health Resources Files and workforce projections), population by age (Census), healthcare employment (BLS) and the competitive inventory, with each input cited.

Medical leases run longer and renew more often than general office. Healthcare Realty's FY2025 10-K puts 58 percent of its leased portfolio on net leases, contractual escalators at 2.90 percent, weighted average lease term at 8.3 years at signing and 4.4 years remaining, retention at 77 to 80 percent by quarter, and about 15 percent of leases expiring each year. Those figures set the rollover and reserve assumptions for a multi-tenant MOB pro forma.

Medical buildout costs more than office buildout because of plumbing, HVAC, shielding and medical gas, and the tenant usually pays the overage above the landlord's allowance. JLL's 2026 Medical Outpatient Building Fit-Out Cost Guide reports all-in fit-out from warm shell at $412 per square foot, of which $226 is hard cost; MMCG cites that guide once the primary document is in hand, and does not publish contractor marketing ranges. The study separates the value of the shell from the value of the specialized improvements so that the appraiser and the lender can see how much collateral value survives re-tenanting. Older SBA guidance listed health and medical facilities among examples of special purpose property, which raises the 504 borrower contribution by 5 percentage points; the study states whether the subject is treated as special purpose under the lender's reading of SOP 50 10 8.1.

A lease between a hospital or practice and a physician who refers to it is lawful only inside the rental of office space exception at 42 CFR 411.357(a). The lease must be in writing and signed and must specify the premises. The term must be at least one year. The space must not exceed what is reasonable and necessary for the lessee's legitimate business purposes and must be used exclusively by the lessee. Rental charges must be set in advance and consistent with fair market value. Rent may not be determined by the volume or value of referrals or by a percentage-of-revenue or per-unit-of-service formula. The arrangement must be commercially reasonable even if no referrals were made. Fair market value for office space, under 42 CFR 411.351 as amended in December 2020, is the value in an arm's-length transaction for general commercial purposes, without adjustment for the proximity or convenience of the lessor as a potential referral source. The Anti-Kickback space rental safe harbor at 42 CFR 1001.952(b) carries parallel elements.

For the pro forma this means that hospital-affiliated MOB rents must be supported by arm's-length comparables and cannot rest on the hospital's willingness to pay for proximity; that space leased to a referral source must be justified by need; that escalators are fixed in advance; and that free rent or excess tenant improvement allowance given to a referral source creates compliance and credit risk at the same time. A feasibility study that documents fair market value with independent comparables protects the lender's DSCR and the borrower's compliance position in the same exhibit.

The usual structure is an Eligible Passive Company that owns the building and leases it to the practice as Operating Company. 13 CFR 120.111 requires the EPC to use proceeds only to acquire, lease, improve or renovate property leased to the Operating Company, under a written lease with a remaining term at least equal to the loan term, with the Operating Company as guarantor. The occupancy rules then apply to the practice: it must permanently occupy and use no less than 51 percent of an existing building, 13 CFR 120.131(b), or 60 percent of new construction with some of the remaining space occupied within three years and all within ten, 13 CFR 120.131(a). Third-party medical tenants count only inside the leasable share, and loan proceeds may not improve space leased to third parties.

SOP 50 10 8.1 with Technical Updates governs loans numbered on or after October 1, 2026. The 504 borrower contribution is 10 percent as standard, 15 percent for a business in operation two years or less or for special purpose property, and 20 percent where both apply; and under Appendix 15 a practice acquisition with real estate is underwritten at 1.25x DSCR on historical cash flow with projections not relied on. Both of those points are reported from lender summaries of the SOP and are confirmed against SBA's text before the study cites them. A start-up practice buying or building its office with no acquisition is underwritten on projections, and the feasibility study is the evidence behind them.

Community Facilities is the main USDA route for a rural clinic owned by a nonprofit or a public body. Health care is an essential community facility under 7 CFR 5001.3 and an eligible project under 5001.103(a)(1). Inherently commercial enterprises are ineligible, but 5001.116(b) carves out private enterprises operated on a not-for-profit basis providing health care to rural communities. Space leased to ineligible users, a private practice or a pharmacy, must stay under 25 percent of floor space, 5001.103. CF direct loans and grants are limited to rural areas and towns of up to 20,000 residents, and the grant has no regulatory maximum; the $150,000 figure that circulates applies only to a set-aside (Congressional Research Service, R48462). For a CF guaranteed loan greater than $1,000,000 to a new entity or an entity conducting a new activity, an independent feasibility study is required, and the Agency may require one below that threshold, 7 CFR 5001.304(a)(4)(i) and (ii).

Business and Industry covers the for-profit side. The purchase and development of land and buildings for private commercial enterprises is eligible under 5001.105(b)(1), and constructing or equipping facilities for lease to private businesses engaged in commercial operations under 5001.105(b)(12), which covers a multi-tenant rural MOB subject to the speculation bar in 5001.115(a) and the control test in 5001.115(g). A B&I guaranteed loan greater than $1,000,000 to a new business requires the independent study, 5001.306(a)(3)(i). USDA guaranteed loans may be combined with New Markets Tax Credit structures under 5001.141, which matters for FQHCs.

Documented Community Facilities clinic awards include the Town of Paxton, Florida, which completed a permanent rural health clinic with a $679,500 CF grant (USDA Rural Development, May 19, 2026); South Central Regional Medical Center in Jones County, Mississippi, which bought the Jefferson Medical Associates clinic and equipment with a $4,213,672 CF direct loan (USDA Rural Development); Good Samaritan Hospital Association in Rugby, North Dakota, which received a $50,243,000 CF direct loan, a $5,000,000 CF guaranteed loan and a $1,000,000 Emergency Rural Health Care grant for a replacement facility with clinic space (USDA Rural Development, October 25, 2022); and DeSoto Regional Health in Mansfield, Louisiana, whose expansion including a 30,000 square foot medical office with a rural health clinic was supported by a $32 million CF direct loan commitment and a $4 million CF guaranteed loan (USDA Rural Development success story). USDA's Community Facilities program also financed the purchase and renovation of a utility cooperative's headquarters building in Cassopolis, Michigan as a 17,000 square foot behavioral health facility with a $4,066,000 direct loan (USDA Rural Development, November 2018 health care chart), a documented office-to-clinic conversion.

MMCG has not located a published USDA B&I guarantee for a clinic, FQHC or medical office building. The eligibility analysis above rests on the regulation text.

A signed report with the exhibit workbook: trade area definition and demographics by age; physician supply and need by specialty with HRSA and Census sources; competitive inventory and lease comparables by provider; the fair market value rent opinion with comparables; the pro forma with DSCR by year under the 7 CFR 5001.3 definition where USDA applies; break-even occupancy; tenant improvement, leasing commission and replacement reserves; sensitivities on rent, absorption and buildout cost; and the conditions under which the determination holds. For an SBA EPC/OC structure the study shows the occupancy split and excludes tenant improvement for the leased share from SBA uses of proceeds.

Studies start at $4,900, fixed fee, delivered in 9 to 16 business days with rush from 5.

The method is set out in full in MMCG's feasibility study methodology.

Michal Mohelsky, J.D., FMVA, Practicing Affiliate of the Appraisal Institute, Principal in charge. MMCG Invest, LLC, 27 Maiden Lane, Suite 625, San Francisco, CA 94108. (628) 225-1110. michal@mmcginvest.com.

Sources: JLL, 2026 Medical Outpatient Building Perspective and press release of March 24, 2026; Transwestern, U.S. Medical Outpatient Buildings, Q1 2026; Cushman and Wakefield, 2026 Vital Signs; CBRE, U.S. Real Estate Market Outlook 2026, Healthcare; Avison Young, Q4 2025 medical outpatient insight; Healthcare Realty Trust, Form 10-K for FY2025 and Q1 2026 earnings call; HRSA, Physician Workforce: Projections, 2023 to 2038 (December 2025); AAMC, The Complexities of Physician Supply and Demand (2024); NACHC, Addressing the Primary Care Workforce Shortage (January 2026); CMS, CY 2026 OPPS and ASC final rule fact sheet (November 21, 2025); 42 CFR 411.351, 411.357 and 1001.952; 13 CFR 120.111 and 120.131; 7 CFR 5001.3, 5001.103, 5001.105, 5001.115, 5001.116, 5001.141, 5001.304 and 5001.306; USDA Rural Development releases cited in text; Congressional Research Service R48462; CoStar Office National Report, October 4, 2026.