By Connor Watson, senior vice president, Partners Real Estate
For years, the investment narrative around medical office as an asset class has been simple: stable demand, recession-resistant tenants and steady growth driven by the shift to outpatient care.
That narrative is still true, but it’s incomplete.
What’s shaping the next phase of healthcare real estate isn’t just demand. It’s a growing imbalance on the supply side. And in markets like Texas, that imbalance is becoming even more pronounced.
Demand Isn’t the Story Anymore
As a trend in healthcare real estate, outpatient migration is well understood at this point. Procedures continue to take place outside of traditional hospitals and within lower-cost settings like medical office buildings and ambulatory surgery centers.
In Texas, that demand is amplified due to the following reasons:
- The major metros continue adding population at a national-leading pace
- Healthcare employment and infrastructure are expanding to keep up with that growth
- Aging demographics and employer relocations are driving sustained utilization of care
These economic and demographic trends have resulted in consistent tenant demand, high occupancy across most major markets and strong rates of retention from healthcare providers. But demand alone doesn’t create outsized opportunities; constraints do.
The Real Shift: Supply Is Slowing Down
New medical office development has quietly pulled back over the past several years. Not because demand isn’t there, but because the economics have changed. That shift is especially visible in Texas.
Developers today are facing:
- Significantly higher construction costs — the average all-in fit-out for a medical office building now runs $412 per square foot, according to research by JLL
- Higher interest rates and tighter capital markets
- More complex healthcare build-outs and regulatory requirements
At the same time, broader commercial construction pipelines are shrinking. Texas is projected to deliver one of the lowest levels of new space in decades relative to inventory, according to the Texas real estate research center at Texas A&M University.
The outcome is straightforward: Fewer projects are getting out of the ground despite strong underlying demand.
Why This Creates a “Hidden” Imbalance
On paper, medical office still looks balanced. Occupancy is high but not spiking. Rents are growing, but not dramatically. That’s what makes this dynamic easy to miss.
Underneath the surface, however, new supply isn’t keeping pace with future demand. In addition, functional, well-located buildings are becoming scarce, and tenants are competing for a shrinking pool of viable space.
These trends don’t show up overnight. They build gradually, then impact pricing, lease structure and investor returns all at once.
What This Means for Owners
Owners of well-positioned assets are gaining leverage. In high-growth Texas markets, that leverage tends to show up first and leads to the following performance metrics:
- Stronger rent growth in suburban corridors
- Longer lease terms as tenants prioritize securing space
- Increased renewal probability due to limited relocation options
Not all assets benefit equally. The winners tend to be those that possess the following characteristics:
- Newer or recently renovated buildings
- Properties with modern layouts and infrastructure
- Locations aligned with population growth, not just hospital campuses
In Texas specifically, that often translates to secondary suburban nodes outperforming legacy medical districts — or retail-adjacent healthcare gaining outsized traction.
What This Means for Investors
In a constrained supply environment, investors have two clear paths: Pay for quality at a higher price per square foot, with the understanding that well-located, high-quality assets in growth markets are becoming harder to replicate. Or they can create new supply through repositioning, and with ground-up development increasingly difficult, Texas investors are leaning into conversion plays.
Where Tenants Still Have Leverage
This isn’t a uniform story. Even in Texas, tenants retain leverage in older Class B and C buildings or within buildings with functionally obsolete layouts. That creates a widening gap between institutional-quality medical office and everything else. And in a state as large and diverse as Texas, that gap can exist within the same metro.
The Bottom Line
Medical office has long been viewed as a stable asset class. What’s emerging now, especially in Texas, is something more nuanced.
A supply-constrained market where growth is outpacing the ability to deliver new product at pricing that is digestible to the market. The next wave of returns won’t come from simply being in the sector. They’ll come from owning the right buildings in the right submarkets, where new supply is no longer keeping up.
In Texas, that shift is already underway; it just hasn’t fully shown up in pricing, yet. This illustrates the importance of consulting with an expert who is actively navigating this complex landscape.