Firms providing non-discretionary goods and services for consumers see less volatility in demand for their business; these goods and services produced are needed by consumers regardless of external factors. As a whole, industries derived from these firms remain largely unaffected by economic trends and downturns when compared to their discretionary counterparts and are often considered recession resistant. In creating a well-diversified portfolio, the inclusion of these asset types should be heavily considered among others.
Within the non-discretionary segment, healthcare is often considered a prime example, as U.S. healthcare expenditures have seen consistent growth over the past several decades and approximately 20% of the current U.S. GDP is spent on healthcare, making it among the highest healthcare spending nations. Coinciding with the healthcare space comes the real estate associated with it, introducing a unique blend of two different industries, both of which create appeal for an addition to a portfolio. The outpatient medical real estate asset class, including medical office buildings (MOBs) and ambulatory surgery centers (ASCs) have seen growing popularity for many reasons as well. Including healthcare and real estate characteristics, the sustained strength of MOBs and ASCs makes them an attractive, lower risk alternative for those looking to grow or diversify their real estate holdings, particularly when one considers the typically high-cash yields healthcare real estate generates as compared to other real estate sectors with similar risk profiles.
Demand for Services
Population trends in the U.S. are becoming increasingly aligned with the need for MOBs and ASCs. In the U.S., nearly 11,000 Baby Boomers turn 65 each day. As of 2024, individuals aged 65 and over constitute 17.3% of the U.S. population and this proportion is projected to exceed 20% by 2030 and 24% by 2060, doubling the 65 and up population. Further, those over 85 will triple from 6.5 million to 19 million. As a general benchmark, those over 65 will spend about five times more on healthcare each year than their younger counterparts.
As the U.S. ages, the healthcare sector must grow alongside to keep up with demand. Currently, healthcare jobs growth remains strong and is outpacing the majority of the U.S. as it is experiencing weak employment trends, pointing further to the strength of the sector.
Geographically speaking, during the period from 2020 to 2040, the Southeastern United States population is projected to grow at a rate nearly 25% faster than the U.S. as a whole (17.5% vs. 14.1%). And over that same 20-year period in the Southeast, the senior population over age 65 is anticipated to increase by over 37%, furthering the need for MOB and ASC space in the region more so than the rest of the U.S.
Demand for Space
As demand for healthcare rises, so does demand for MOBs and ASCs. Across the U.S., MOBs and ASCs are experiencing high occupancy. The demand for medical office space is outpacing supply in most regions as MOB occupancy continues to climb amid record low completions and lack of available inventory.
Site of Care Delivery
A major factor driving the strength of outpatient healthcare real estate is the ongoing transition toward decentralized, community-based access to care. This shift is fueled by the convergence of regulatory, technological, and market forces.
According to the Advisory Board, outpatient volumes in the U.S. are projected to increase 10.6% over the five-year period beginning in March 2025, as both consumers and providers continue to favor outpatient over inpatient settings.
Gensler, a leading global architecture, design, and planning firm, notes that “the increasing capabilities and operational simplicity of clinical technologies allow formerly complex procedures, such as hip replacements, to be delivered in outpatient healthcare settings. The resulting healthcare real estate trend will be to migrate clinical services, to the greatest extent possible, from hospitals to primary- and secondary-service areas in local communities.”
Outpatient and ambulatory surgery care are more affordable for patients, more cost-effective for providers, and more convenient for both, all while supporting high-quality care and sustained demand for modern, well-located medical real estate.
Long-Term Tenancy and Stable Cash Flow
The stability of healthcare real estate is driven largely by the nature of its tenancy. Healthcare providers are deeply invested in their locations — both through specialized facility design, equipment, and infrastructure, and through their established market share within local communities. Once rooted in a market, providers are unlikely to relocate and risk disrupting patient relationships or losing share.
These factors lead healthcare tenants to sign longer leases than tenants in other sectors. Lease terms for medical offices typically range from 7 to 15 years, with an average of 12.5 years, compared to 4.3 years for general office tenants across the U.S.
Renewal rates for medical office space generally exceed 80%, while annual rent growth averages 2–3%. Triple-net leases are common, and the tangible, necessity-based nature of the underlying real estate provides an effective inflation hedge — all of which contribute to long-term stability in occupancy and income. Even during the 2008 financial crisis, occupancy in healthcare real estate never fell below 90%, and following the pandemic-related shutdowns of 2020, renewal rates strengthened as physician employment and service volumes quickly rebounded.
Conclusion
While no investment is entirely immune to macroeconomic challenges, the resiliency of outpatient healthcare real estate has been proven across multiple market cycles. This strength is underpinned by a combination of durable demand drivers — including healthcare service needs, constrained supply, the ongoing site-of-care transition, and long-term tenancy fundamentals. Collectively, these characteristics define a defensive, income-producing asset class capable of enhancing diversification within a portfolio.
Flagship Healthcare Trust is a private, open-ended real estate investment trust specializing solely in outpatient healthcare real estate in the southeastern U.S. With the manager’s track record dating back to 2005, Flagship has known the characteristics of this space to be true and is well positioned to continue to capture results and provide the best outcomes for all we serve.
Disclosure:
This material is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any securities. Any such offering is made only to accredited investors pursuant to a private placement memorandum and other definitive offering documents. Past performance is not indicative of future results. All investments involve risk, including potential loss of principal.
