Medical Office vs. Traditional Office Market – Mid-2025 Comparison

 True Health Center for Functional Medicine 8105 Saratoga Way, El Dorado Hills, CA 95762

Macroeconomic & Policy Backdrop

The first half of 2025 has been marked by an uneven economic landscape and shifting policies that affect commercial real estate. The U.S. economy entered 2025 with solid momentum (2.8% GDP growth in 2024), but new policy moves by the administration have introduced uncertainty. In particular, rapidly changing trade tariffs and efforts to reduce the federal workforce have weighed on business confidence and even led to a slight economic contraction in early 2025. High interest rates also persist, keeping capital costs elevated for real estate owners and developers

Critically for offices, job growth in traditional office-using sectors has stalled, whereas healthcare employment remains a bright spot. Over the past year, payrolls in information, professional, and business services were flat or declining, but ambulatory healthcare jobs grew about 3.5%. This divergence directly impacts space demand: more healthcare jobs are bolstering medical office requirements even as traditional office demand languishes. Additionally, a gradual return-to-office (RTO) trend is underway – office attendance is up nationally (with markets like New York approaching 95% of pre-pandemic levels)  – which provides a modest boost to traditional office utilization. Government policies are playing a role here as well; for example, the federal government has signaled a push for employees to return in-person, which could increase usage of office space. At the same time, the administration’s expected fiscal stimulus could support stronger economic growth and hiring (a positive for office demand), while the elevated risk of recession and volatile trade policy remain downside risks that make both occupiers and investors cautious.

From a macro perspective, medical office (healthcare real estate) benefits from secular tailwinds that insulate it relative to traditional offices. An aging population, steady healthcare spending, and the inability to “remote work” core medical services mean medical offices have more stable demand through economic cycles. Even during the pandemic, medical providers eventually needed to resume in-person visits and elective procedures, sustaining occupancy for healthcare properties. In contrast, traditional office demand faces a more structural challenge due to remote work adoption; many companies have re-evaluated their space needs since 2020. In short, as of mid-2025 the economic/policy climate offers modest growth and higher interest rates for all real estate, but the healthcare sector’s growth and policy emphasis on in-person services give medical office a relative advantage in demand stability.

Leasing Trends, Vacancy & Demand Dynamics

Traditional Office: The broader U.S. office market is still recovering from the pandemic shock. As of Q1 2025, the national office vacancy rate stands at 14.1%, up about 450 basis points from late 2019 . This is near an all-time high for vacancy, though importantly vacancy flattened in the past two quarters – a sign that move-outs have slowed and leasing demand is beginning to keep pace with supply . In fact, Q1 2025 saw roughly 110 million SF of new leases signed nationally, almost back to the pre-pandemic quarterly norm (115 million SF) . Net absorption turned slightly positive in early 2025 in about half of major office markets, helping hold vacancy steady  . This indicates the office market has entered a tentative recovery phase, after tenants gave back massive amounts of space in 2020-2022. Companies are showing more willingness to lease or at least retain space, especially as more employees return to offices part-time. That said, leasing activity is very “nuanced” and altered in character  – deal sizes are ~15% smaller than pre-2020 norms and many large corporate tenants are still hesitant to expand footprints . Smaller and mid-size firms are driving most of the leasing by upgrading to better spaces (flight-to-quality), while big firms often renew in place or downsize rather than relocate . And notably, about half of top office markets are still seeing occupancy lossesor flat demand, underscoring an uneven recovery geographically . Markets with improving office demand include several Sun Belt metros and New York (benefiting from higher in-office attendance), whereas tech-heavy markets and some gateway cities continue to struggle. On the whole, traditional office leasing demand remains fragile and below potential, reliant on stronger job growth to meaningfully improve. Sublease space is still abundant, and many tenants continue rightsizing their footprint, which could keep vacancy elevated through 2025 absent a big economic boost.

Medical Office: In contrast, the medical office sector (outpatient clinics, medical office buildings) has demonstrated far more resilience in occupancy and demand. Vacancies in medical office properties are significantly lower – generally in the high single-digits (%). For example, the average medical office vacancy rate was about 9.7% in Q1 2024 (up only modestly from a year prior). While there was a slight uptick in medical office vacancy during 2023 due to a wave of new deliveries, it remains well below the vacated space levels seen in traditional offices. In fact, medical office vacancy is forecast to peak by late 2024 around 10% and then trend down in 2025 as new high-quality buildings get absorbed. Many markets saw only a mild impact from the pandemic on medical occupancy – patients deferred some visits in 2020, but by 2021 healthcare usage rebounded, keeping clinics and physician offices in demand. In some metro areas, medical office vacancy today is at record lows. As one example, San Diego’s medical office vacancy fell to its lowest level in over 15 years during this period, even as that city’s traditional office vacancy hit a decade-high. This dichotomy underscores how medical tenants did not give up space like traditional office users did when COVID hit and remote work became widespread. Healthcare providers generally need physical facilities to see patients, and many expanded footprint to accommodate growing demand (especially in specialties like outpatient surgery, diagnostics, and urgent care). Thus, medical office absorption has been consistently positive or stable, even when traditional office saw steep negative absorption. Healthcare employment growth of ~3–4% annually (far above overall job growth) directly translates into demand for more medical office space. Another advantage: medical office leases often come with longer terms and high renewal rates, since practices build patient relationships at a location and invest in medical build-outs. This sticky tenancy contributes to steadier occupancy. Indeed, even during economic slowdowns, people require medical services – providing a baseline demand that keeps medical offices bustling relative to discretionary corporate offices.

In summary, by mid-2025 traditional offices are grappling with historically high vacancies and a slow, uneven leasing rebound, whereas medical offices enjoy tight vacancy and consistent demand supported by healthcare needs. The medical office sub-sector entered 2025 on a much stronger footing – effectively already in expansion mode – while the general office sector is only just starting to stabilize after a deep downturn . Going forward, office landlords are hoping increased return-to-office momentum and economic growth will broaden the recovery. But even in a best case, most observers expect traditional office vacancy to remain elevated through 2025, only possibly inching down in late 2025 or 2026. Medical office, on the other hand, is poised to stay near full occupancy, with potential to tighten further if healthcare hiring continues at above-trend rates (which is projected for the rest of the decade).

Construction Activity & Pipeline Differences

New development of office space has slowed dramatically nationwide – a crucial trend that differentiates the future supply outlook for medical vs. traditional offices. After a final burst of projects that broke ground pre-2020, developers have pulled back sharply on speculative office construction. Total office space under construction in the U.S. is about 67.9 million SF as of mid-2025, the lowest level in over 13 years . Furthermore, new construction starts are at record lows – less than 16 million SF started in the past four quarters, far below historical norms . In fact, each of the past eight quarters ranks among the 10 slowest on record for office groundbreakings, underscoring the development freeze.

The result is that once the remaining projects under way deliver, the pipeline will essentially “slow to a trickle” in 2025-2026 . Only about 41 million SF of gross new office deliveries are expected in 2025 (with roughly 12 million SF of that already completed by Q1) . Net of demolitions and removals, 2025 net new supply could be under 26 million SF – extraordinarily low for an economy of this size . For perspective, the U.S. averaged ~70 million SF of office deliveries annually over the past decade . And looking further out, current forecasts show cumulative net additions of <50 million SF TOTAL over 2026–2029 . In other words, the development pipeline for traditional office is collapsing. This retrenchment reflects developers’ and lenders’ recognition that the U.S. already has plenty of office space (in many cases, too much), and that demand growth is uncertain. High interest rates and construction costs also make new projects hard to justify .

Not only is the pipeline shrinking, it’s also qualitatively different than in the past. A much larger share of what is being built falls outside the realm of traditional speculative office. CoStar data reveals that only <33% of office space now under construction is intended as traditional, multi-tenant office, whereas historically that figure was nearly two-thirds . The rest of the pipeline consists of specialized or user-specific projects – about 13% medical office, 17% life-science lab space, and ~38% build-to-suit offices for owner-occupiers . This is a striking shift. It means developers are largely focusing on segments like medical office and biotech (which have strong tenant demand) or building offices only when a specific company or government agency has committed to occupy (owner-occupied projects), rather than building generic office towers on spec. Medical office construction, in particular, makes up roughly one-eighth of all office space being built – a notable share. Hospitals and healthcare providers have been investing in new outpatient facilities, and these projects are moving forward even as pure office projects stall. The implication is that new supply competition will be very limited for most traditional offices in the next few years (which is good news for landlords of existing properties), but medical office will see a modest stream of new product coming online (which is generally welcome, since demand is growing for those spaces). Importantly, much of the medical office development is highly pre-leased or in strategic locations – for instance, on hospital campuses or in growing suburban communities. According to CBRE, only 19% of medical office buildings under construction are on hospital campuses, yet those account for 40% of the MOB square footage being built (because they tend to be larger projects). Off-campus medical offices being built are typically smaller clinics (average ~26,500 SF) serving residential . Overall, annual medical office deliveries have been relatively steady over the past decade, and strong tenant demand means the new space is absorbed quickly – CBRE projects the amount of occupied medical office space nationwide will hit a record high over the next year as new buildings fill up.

Another difference is on the supply subtraction side: Developers and cities are starting to remove or repurpose obsolete office buildings to chip away at the glut of excess space. Demolitions of older offices have increased, and conversions to other uses (residential, hotels, etc.) are being pursued where feasible. However, these efforts are only making a small dent at the national level – an analysis suggests only around 1% of office inventory is a likely candidate for conversion(though in a few markets like San Francisco it could reach 5%) . So while office demolitions have risen (over 5 million SF were demolished in 2024, as shown in the chart above), they are far from solving the oversupply issue on their own. Still, the combination of **few new builds plus some removals means the office supply is on track to shrink or barely grow in coming years – a stark reversal from the pre-2020 growth trend. This bodes well for landlords in the long run, as scarcity of new high-quality space could eventually put a floor under rents. CoStar analysts note that the limited pipeline could present opportunities for owners of older buildings to invest in renovations and upgrades, making their properties more competitive in an environment of negligible new competition . Well-capitalized owners are indeed considering adaptive reuse or major retrofits for underutilized offices, especially as pricing resets lower.

For medical office, the controlled pace of new construction is a positive: it keeps supply and demand in balance. Medical offices have never been overbuilt to the extent standard offices have – development is often constrained by proximity to hospitals or Certificate of Need regulations for certain facilities. In 2023-2024, medical office construction did tick up slightly (developers responded to the high demand by delivering modern MOB product), but it remains moderate and almost entirely pre-leased. Thus, the medical office pipeline is adding quality space without creating a vacancy issue. In fact, the addition of new, high-quality MOBs is expected to raise asking rents and meet pent-up demand in markets that need more modern clinical space. For example, many health systems are expanding outpatient networks, and for investors these new builds are attractive as they come with long-term leases from credit medical tenants.

In summary, new supply dynamics strongly favor the medical office sector’s stability. The broader office sector is seeing an unprecedented pullback in construction – good news for existing assets in the long term, but also a sign of how weak developer confidence is in traditional office demand. The few projects that are proceeding are largely in the medical and life-science arena or custom-built offices, reflecting where demand is strongest. With essentially no speculative office towers on the horizon, any recovery in office occupancy will not be undercut by new supply – but landlords will still contend with high vacancies in older stock. Meanwhile, medical office will continue to get a trickle of new, state-of-the-art space to satisfy growing healthcare needs, but not enough to upset the sector’s favorable supply/demand balance. If anything, the constraint on overall development could make existing well-located medical office properties even more valuable, as providers compete for quality space to serve patients.

Rent Growth Patterns and Effective Yield Outlook

Rental performance in the traditional office sector has been underwhelming, whereas medical office rents have managed to climb steadily. Office landlords are finding it difficult to push rents in a high-vacancy environment, and generous concessions (free rent, larger TI packages) remain commonplace to attract tenants. Nationally, average asking rents for office space are effectively flat to slightly up in nominal terms – CoStar forecasts only around 1% annual rent growth for offices through mid-2026 . In real (inflation-adjusted) terms, that equates to continued rent stagnation or decline. There is a bifurcation by asset quality: top-tier, modern office buildings in desirable locations are still able to achieve rent increases (they’re benefiting from flight-to-quality as tenants upgrade), whereas older Class B/C buildings face downward rent pressure or require discounting . CoStar notes that the dearth of new construction could allow the best properties to mark rents higher due to lack of competition, but if tenants refuse to lease lower-tier buildings, those buildings’ rents will fall further behind . Indeed, outside a few pockets of growth (e.g. South Florida, Las Vegas, parts of the Inland Empire where office rents rose 3–4% over the past year amid local supply constraints ), effective office rents are expected to remain roughly stagnant for the next 12–18 months . Many markets simply have too much available space relative to demand, limiting landlords’ pricing power. Additionally, high inflation and interest rates increase tenants’ focus on cost control, so companies are negotiating hard on rents. In short, the broad office market’s rent growth outlook is muted – slight nominal increases at best in most places, with the real possibility of further effective rent declines once concessions are factored in.

Medical office rent trends tell a much more optimistic story. Medical office buildings (MOBs) have enjoyed consistent rent growth, outpacing traditional offices by a wide margin. Since 2020, asking rents for MOB space nationally have risen roughly 6.5% cumulatively, versus less than 1% total growth for traditional office rents In other words, medical office rents kept climbing even through the pandemic and recovery, whereas office rents barely budged (and in some areas are still below 2019 levels after dipping). The sustained demand for healthcare services has empowered MOB landlords to raise rents steadily. Even in late 2023 when overall rent growth moderated, medical office rents ticked up again in early 2024, maintaining that ~6-7% above pre-pandemic. By mid-2025, many markets are seeing record-high rents for well-located medical office space, especially for new construction on hospital campuses or large regional clinics. One driver is that new MOB deliveries coming to market tend to be higher quality (with specialized buildouts and amenities), which command premium rents – this lifts the average rent. Additionally, healthcare providers value location and may compete for space near referral sources or patient populations, allowing landlords to secure annual rent escalations and healthy renewal increases. According to CBRE, this trend is expected to continue: the infusion of newly built medical offices and persistent demand should keep MOB rent growth positive in the foreseeable future. Unlike general office, very few medical office landlords are having to cut rents; on the contrary, medical tenants are absorbing moderate rent hikes because their own revenues (backed by rising patient volumes and insurance reimbursement rates) can support it. It’s worth noting that medical office leases often have annual escalators (e.g. 2-3% per year)baked in, providing built-in rent growth that many traditional office leases lack. This contributes to stronger effective rent growth over time in the MOB sector.

From an investor’s perspective, the “effective yield” or cap rate trends highlight a stark divergence in the valuation of traditional vs. medical office assets. The office sector has undergone a significant cap rate expansion (price decline)since 2022. With higher interest rates and uncertainty around future cash flows, investors are demanding much higher yields for office acquisitions. As of early 2025, market cap rates for multi-tenant office buildings generally range from about 8% up to 10% (or even higher for very challenged properties) . This is a dramatic reset from 2019–2020 when prime offices in many markets traded at cap rates in the 5–6% range. CoStar estimates that on average, investment-grade office values have fallen 45–50% from their peak in 2021 . In other words, nearly half of office asset value has been wiped out, primarily due to this cap rate decompression (and secondarily due to some NOI decline). The implied pricing discounts are massive – for example, one recent sale of a suburban office campus in New Jersey was at an 8.6% cap rate, reflecting a value roughly half of what it might have commanded at a 5% cap two years prior . Even the highest quality office towers are seeing cap rates in the 7%+ range if sold today, and lesser quality or vacant offices are extremely difficult to sell at any price. By contrast, medical office cap rates have risen only modestly and remain lower on average. MOB cap rates in Q1 2024 averaged around 7.0%, compared to ~7.4% for traditional office. The spread between medical and general office cap rates reached a record 50 basis points in 2024– reflecting investors’ preference for the stability of medical income streams. In practice, cap rates for top-tier, long-term leased medical office buildings (especially those backed by hospital systems) can be even lower, often in the mid-6% range. For instance, a portfolio of Long Island medical office buildings traded in 2025 at a cap rate around 7%, and single-tenant MOBs with credit tenants have been seeing cap rates in the 6.0–6.5% range in some deals (still higher than the ~5.5% common in 2021, but significantly below yields for equivalent office assets). The smaller increase in MOB cap rates (roughly +75–100 bps from 2021 to 2025, versus +200–300 bps for offices) means medical office values have been far more resilient. By CBRE’s figures, MOB cap rates actually declined by 10 bps in early 2025 to 6.9% – the first sign of cap rate compression in years, as investor demand began to stabilize – whereas traditional office cap rates have not shown any sustained decline yet. This suggests the pricing correction for medical offices may have bottomed out sooner, with some buyers viewing current yields as attractive relative to the low risk profile.

What is driving these yield differences is risk perception and cash flow stability. Medical offices are seen as a defensive asset class, more akin to multifamily or necessity retail in terms of reliability, so the risk premium investors require is lower. Even in a higher interest rate environment, many buyers (including healthcare REITs and private equity focused on medical properties) remain willing to accept a 6.5–7% cap rate for quality medical offices, confident in long-term occupancy and rent growth. Lenders also favor medical office in their underwriting, which helps keep cap rates down (financing is a bit more accessible for MOB acquisitions than for generic offices). On the other hand, traditional offices are considered highly risky today, due to the uncertainties around future occupancy (will work-from-home reduce space needs permanently?), leasing costs, and refinancing challenges. Many institutional investors have essentially frozen new acquisitions of multi-tenant office, and those transacting are often opportunistic firms demanding distressed pricing (hence the 8–10%+ cap rates). As more office properties trade at these reduced values, appraisals are resetting lower across the board. One silver lining: if and when office vacancies peak and begin to improve, we could see cap rates stabilize or even compress slightly as investor confidence returns. But for now, the yield outlook for traditional offices remains cloudy, with some further value declines possible in 2025 until the market finds a floor. In contrast, the yield outlook for medical office is relatively positive – most participants expect MOB cap rates to remain flat or maybe compress slightly in the next year as the sector’s strong fundamentals attract capital. Essentially, medical office assets are maintaining their status as income-producing, lower-volatility investments, so pricing for them should be more durable even in a higher rate regime.

Capital Markets: Sales Volume, Pricing, and Investor Appetite

The divergence in fundamentals between medical and traditional offices is also evident in capital markets activity. Over the past year, transaction volumes for office properties sank to cyclical lows as interest rates rose and buyers and sellers hit a pricing impasse. By late 2023, U.S. office sales were down more than 50% year-over-year. However, early 2025 has shown a tentative pickup in office investment activity off those lows . Total office transaction volume in 2024 was up ~22% from the rock-bottom level of 2023, and momentum carried into Q1 2025 with sales volume 39% higher than Q1 2024 . This sounds like a big jump, but it’s important to note the comparison is to exceptionally weak activity – even with that increase, office sales are still a fraction of their peak ($49.7B in sales over the past 12 months vs. over $140B at the 2007 peak) . Essentially, the office investment market is just beginning to thaw, primarily through price discounts. Most of the recent buyers are opportunistic private investors and some owner-users, snapping up buildings at significant discounts to prior valuations . Notably, institutional investors and REITs have been net sellers of office since 2022 – they have largely stepped back, leaving the field to smaller players and special situation funds . Examples abound: In one case, Disney purchased an Orlando office asset in early 2025 for $183/SF, a “modest” discount relative to comparable sales pre-pandemic, while Lone Star (a private equity fund) acquired a Denver CBD tower for ~$187/SF, essentially the same price it sold for in 2009  . These deals underscore how far values have fallen – trading at 2000s-era pricing – and the type of buyers willing to engage.

Medical office investment, by contrast, has been comparatively active and competitive throughout. Although MOB sales volume also dipped in 2022-2023 as interest rates climbed, it did not freeze to the extent traditional office did. There remains a deep pool of capital targeting healthcare real estate: dedicated healthcare REITs, institutional funds with mandates for medical properties, and even cross-over investors like private equity and high-net-worth individuals seeking stable income. Medical office sales include a mix of one-off acquisitions and large portfolio trades or sale-leaseback deals with health systems. For instance, several hospital systems have monetized outpatient facility portfolios, and these offerings attracted strong bidding despite the market volatility. By 2024, the cap rate spread between buyers’ and sellers’ expectations for MOBs narrowed, enabling more deals to transact. Anecdotally, a three-property medical office portfolio in New York traded in 2025 at a 7% cap ratelibn.com – a level that indicates both the buyer and seller found common ground (7% being a fair yield given financing costs). Many medical office deals are still priced near or even above their pre-pandemic values, especially if they have long leases, because the income stream is viewed as very secure. In fact, CBRE’s data showing MOB cap rates dipping in Q1 2025 suggests investors are again bidding up prices for the best medical assets.

From a lending perspective, medical office also has an edge: Banks and mortgage lenders have grown extremely conservative on traditional office loans (due to high vacancy and valuation uncertainty), often requiring low leverage and interest rate reserves, or avoiding the property type altogether. In contrast, lenders are comparatively more willing to finance medical office acquisitions and refinancings, given strong occupancy and tenant credit (e.g. investment-grade health systems). This easier access to debt helps support MOB transaction volumes and pricing, whereas many potential office building buyers simply cannot get financing today – which further illiquifies the office market. The result is a self-reinforcing cycle: traditional office liquidity remains limited, and when deals do occur it’s often distressed, while medical office liquidity is better, with a range of buyer types actively pursuing deals. Cap rates for both have risen, but as described, far less for MOBs.

Pricing trends in sales illustrate the bifurcation. On a price per square foot basis, top-tier medical office properties often trade in the $300–$500/SF range (depending on location), not far off from pre-2022 pricing, whereas multi-tenant offices in many markets have dropped to $100–$200/SF or less (some distressed offices are trading below replacement cost, <$100/SF)  . Value decline in the office sector has been so severe that many owners are surrendering buildings to lenders or selling at a loss. Office distress has ticked up: by late 2024, office loan delinquency rates reached nearly 10% . We have begun to see more instances of loan defaults and foreclosures on office towers, something virtually unheard of for medical office (where occupancy and cash flows held up, keeping loans current). Investors recognize this difference – medical office is considered a far less distressed asset class. As a result, while opportunistic funds are bargain-hunting in the office space (looking for 9–10% cap rate deals they can eventually profit from), core and core-plus investors are still eagerly allocating capital to medical office at 6–7% caps for stable income.

Looking ahead, capital markets sentiment for medical office is likely to remain positive. The combination of dependable occupancy, long-term leases (often with annual rent bumps), and healthcare industry growth makes MOBs a favored asset for defensive investment strategies. If interest rates stabilize or decline, we could even see a surge of capital back into the MOB sector, compressing cap rates further. On the traditional office side, the road to recovery in capital markets is more uncertain. Investors and lenders will want to see concrete signs of a turnaround – such as several quarters of positive absorption, a peak in vacancy, and more clarity on future space usage – before confidence returns in force. CoStar’s house view expects that once vacancy does conclusively peak (perhaps in late 2025) and no new supply is entering, some capital will re-enter the office market to pick up assets at their cyclical low pricing . However, any rebound in office values is expected to be gradual and selective: the best-located, high-quality assets will recover first, whereas older or poorly located offices might continue to trade at deep discounts or face repurposing.

In summary, the capital markets are effectively signaling a flight to safety: medical office properties are still able to trade at relatively healthy prices and volumes, reflecting their perceived stability, whereas traditional office properties are being traded infrequently and at distressed pricing levels. This divergence may persist until the fundamental challenges facing offices (high vacancy, hybrid work, refinancing hurdles) are resolved or at least clearer. For now, investors and lenders broadly view medical office as a more “resilient” bet, and they underwrite it with more confidence, while treating generic offices with caution.

Resilience and Long-Term Outlook: Medical Office vs. Traditional Office

Considering all the above factors, medical office space is widely seen as more resilient in the long run than traditional office space. The tailwinds supporting medical office are structural and enduring: an aging population requiring more healthcare services, a continued shift from inpatient hospital care to outpatient clinics (which boosts demand for medical office facilities), and the fundamental need for in-person medical visits and procedures. These trends suggest that medical office demand will keep growing at a steady pace – indeed, healthcare employment is projected to grow faster than overall employment for the next decade . Even as the growth rate of healthcare jobs may moderate slightly, it is expected to remain above the pace of total job growth, meaning medical office absorption should outpace that of the general office market in the years ahead . Occupancy in medical office buildings tends to be high (often 90-95% or more) and much less volatile over economic cycles. During recessions, companies often cut back on office space, but people do not stop getting sick or requiring medical care – if anything, healthcare usage can be more stable or even counter-cyclical. This was evident during the pandemic recovery: while many corporate offices remained half-empty, medical offices quickly refilled with patients once restrictions eased, and some even had waiting lists for space by physician groups. For investors with a long-term horizon, medical offices offer an attractive combination of stable occupancy, growing rents, and lower risk of obsolescence. Most medical tenants sign long leases and renew at high rates, and because medical build-outs are expensive, tenants are reluctant to relocate. All of this contributes to resilience in cash flows.

Traditional offices face a more challenging and uncertain long-term outlook. The rise of remote and hybrid work is not a temporary phenomenon but a lasting shift for many industries. While there has been some increase in office utilization in 2023-2025 (with more employers encouraging returns), few expect office demand to ever fully return to the pre-2020 status quo. Surveys show many companies plan to incorporate hybrid schedules permanently, which could reduce their overall space needs per employee. Some large tech firms that expanded footprints in the 2010s have already sublet or exited significant portions of their offices. As a result, the secular demand growth for traditional office space is likely to be slow at best – perhaps only tracking population growth (~0.5% per year) as Oxford Economics forecasts, versus the ~1%+ annual growth rates seen in decades past . This implies that absorption of the existing vacant office space will be a protracted process, taking the remainder of the decade in many markets. The current national office vacancy (~14%) may gradually trend downward starting in 2026, but only if economic growth is solid and there is a broad-based return to office trend  . If the economy slips into recession or if hybrid work further intensifies, office vacancies could even rise again in the near term . Another challenge is obsolescence: much of the older office stock is not well-suited to what tenants now want (e.g. highly amenitized, healthy buildings with great location). Those buildings will either require significant investment to retrofit or face functional obsolescence. In contrast, medical offices generally don’t face the same degree of obsolescence – a 30-year-old medical office in a good location can still be perfectly functional because patient visits are more about convenience and provider presence than having flashy office amenities.

That said, it’s not all doom and gloom for traditional offices. There are scenarios where the office market could find a new equilibrium and even see a renaissance of sorts. If employers increasingly emphasize in-person collaboration to boost productivity, we could see a stronger push back to offices, which would stabilize demand. Already, some large firms have reversed course on remote work, and the prospect of more in-office work is an upside risk for the office market outlook . Additionally, as prices have fallen so far, there is an opportunity for investors to reposition and reinvent underutilized office properties – whether through conversion to alternative uses (residential, hotels, schools) or through transforming them into modern, creative workplaces that meet new preferences. Cities and developers are beginning to work on these adaptive reuse projects; success in those could remove surplus office inventory and create something beneficial, thereby helping the overall office sector heal faster. Moreover, any economic initiatives (such as federal stimulus spending) that spur job growth will ultimately benefit office demand broadly . CoStar notes that the risks to the office outlook are “weighted slightly to the upside” in mid-2025, meaning there is cautious optimism that things might turn out better than baseline if certain positive factors materialize . Even so, few expect a return to tight office market conditions in the near future – the new normal will likely be a higher vacancy environment compared to the 2010s, and rent growth will be limited by that overhang of space.

Medical office’s long-term outlook is decidedly more robust. The healthcare sector continues to expand, driven by demographics and medical advances. There is also a trend of healthcare services decentralizing out of hospitals into outpatient settings – be it ambulatory surgery centers, urgent care clinics, or medical office-based labs and imaging centers. This supports ongoing demand for well-located medical office real estate. One potential headwind for medical office could be the rise of telehealth reducing the need for some physical visits. Indeed, telehealth usage jumped in 2020 and remains a part of care delivery for routine consults. However, telehealth is more a complement than a replacement; many appointments (diagnostic tests, procedures, vaccines, etc.) cannot be done remotely, and often telehealth can actually expand the patient pool, leading to more in-person follow-ups. Thus, telehealth is not expected to significantly dent medical office space needs in aggregate. Another consideration is that medical office construction, while limited, is adding some new supply – but as discussed, it’s largely meeting existing demand. If anything, the new supply is of better quality and may draw tenants out of older medical buildings; investors will want to monitor and perhaps upgrade older assets to remain competitive (similar to the dynamic in traditional office, though the risk is smaller in medical).

In comparative terms, medical office is poised to maintain lower vacancy, steadier rent growth, and stronger investor demand relative to traditional office for the foreseeable future. Medical office cap rates are expected to remain lower and values to hold up, supported by plentiful capital seeking healthcare real estate. Traditional office, conversely, may remain a “value play” for opportunistic investors for a while, until fundamentals improve enough to regain classification as a stable core asset. Lenders will likely continue to differentiate as well – offering more favorable terms to medical office deals and scrutinizing office loans heavily. This divergence could even widen if, for example, another shock hits the economy: medical office would likely weather it with maybe a small rise in vacancy, whereas traditional office could see a more marked drop in occupancy and further valuation stress.

To conclude, investors and lenders view medical office as a resilient, needs-driven real estate sector that has proven its mettle through the pandemic and beyond, while the traditional office sector is still finding its footing in a post-pandemic world of hybrid work. Medical office’s stability is underpinned by real demand and limited supply, which translate into reliable income and better long-term performance. Traditional office does have a path to recovery – especially for modern, well-located properties – but it faces a longer grind to adapt and right-size to the new demand environment. For those allocating capital, the risk/return profiles are clearly different: medical office offers a defensive play with modest growth and income security, whereas traditional office is a higher-risk play that could yield high returns if a turnaround occurs, but also carries significant uncertainty. In the near term, we expect medical office to continue outperforming on occupancy and rent metrics, and to remain a favored asset class for prudent investors. Traditional office will require patience and perhaps creative strategies to unlock value, but if the broader economy and office culture trends turn favorable, it could eventually stage a recovery – albeit one that will likely lag the medical office sector in both timing and magnitude.

June 7, 2025 by a collective of authors at MMCG Invest, LLC, an office feasibility study consultant

Sources: 

• CBRE Research. (2025). U.S. Medical Office: Outpatient Expansion and Resilient Demand Trends. Internal data and published briefings, 2023–2025.

• Oxford Economics. (2025). U.S. Macroeconomic and Employment Forecasts. Used for benchmarking job growth, labor force trends, and sector-specific employment projections.

• First Mile Capital / Lone Star / Equity Commonwealth Transaction Data. (2024–2025). Real estate deal insights and cap rate disclosures sourced from public transaction records and CoStar Capital Markets intelligence.

• CBRE U.S. Healthcare Capital Markets Group. (2024–2025). Medical Office Cap Rate Survey and Market Commentary. Referenced for spread trends between MOB and traditional office sectors.

• Federal Reserve / Bureau of Economic Analysis. (2025). Consumer Price Index, PCE Inflation Metrics, and Interest Rate Policy Commentary. Applied in macro context of rent and valuation trends.

• U.S. Department of Health and Human Services. (2025). Ambulatory Healthcare Growth and Policy Reports. Utilized for evaluating structural drivers of medical office space demand.

• Moody’s Analytics CRE / Trepp. (2024–2025). Office Delinquency Rates and Distress Data. Provided context on risk differentiation between medical and traditional office segments.