Healthcare real estate faced tighter conditions in the second quarter, with leasing activity declining significantly. A recent analysis found occupied space expanded faster than new supply, raising occupancy to 92.4% and reducing available space to about 69 million square feet. This imbalance reflects a broader trend where demand for medical facilities outpaces the rate at which developers can bring new properties online.
Net absorption reached 3.5 million square feet, marking a 152% increase from the same period last year and a 42% rise from the first quarter. Deliveries totaled 2.2 million square feet, while leasing dropped 25% year-over-year and 18% from the previous quarter, ending at 7.5 million square feet. The surge in net absorption, despite the decline in leasing, suggests that tenants are holding onto space longer, reducing turnover. The discrepancy between absorption and leasing also indicates that much of the occupied space is being retained by existing tenants rather than absorbed by new ones.
Renewals are now driving occupancy despite the slowdown in new deals. The difference between absorption and leasing indicates underlying strength, though fewer large expansions or relocations are occurring. Limited tenant options have pushed more activity toward lease extensions.
The development pipeline contracted to 18.9 million square feet by the end of the quarter, down 10.1% from a year earlier and 2.2% from the first quarter. Annual deliveries fell nearly 38% below their year-ago level. Rising construction costs, tighter financing conditions and greater project selectivity are limiting new starts. The effects are particularly significant in a sector with aging inventory. Across every U.S. region tracked by Avison Young, the average Class A healthcare property was at least 17 years old, while the average age of Class B buildings was considerably higher.
Rents are increasing as supply remains limited. Average triple-net rents climbed 2.8% year over year to a record $26.75 per square foot, while availability dropped to 7.6%.
Tenants continue paying premium rates for high-quality medical outpatient space, though rent growth is now affecting more than just Class A properties. The 90th percentile held steady at $42 per square foot, while median rents rose to $25.38.
Unless financing conditions improve, the pipeline may remain constrained. That could sustain high occupancy and stable rents, even if leasing volume stays low.
Developers are adjusting strategies to handle these challenges, as seen in recent market adjustments across similar sectors.
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