The Tenant That Competes With Its Landlord

The shift from inpatient to outpatient care continues. Vizient projects that outpatient volumes will grow 20% from 2026 to 2036, against 7% for inpatient discharges. It projects office and clinic visits will rise 16%, to 2.87 billion, and hospital outpatient department and ambulatory surgery center volumes 15%, to 803 million (Vizient projection, June 2026).

Medicare data shows the same shift. Fee-for-service beneficiaries averaged 3.0 hospital outpatient encounters each in 2024, up 4.0% from 2023. Ambulatory surgery center volume per beneficiary rose 3.5% in 2024, after averaging 1.3% a year from 2019 to 2023 (MedPAC, March 2026).

Policy pushes in the same direction. The CY 2026 Medicare outpatient payment rule begins a three-year phase-out of the inpatient-only list and adds 547 procedures to the list ambulatory surgery centers are permitted to perform (AHA News, November 2025).

The economics favor the outpatient building, with one exception. As Jeff Axley, Managing Principal, Ridgeline Capital Partners, put it: "But it is cheaper in general to not deliver care in an acute care hospital. ... It's cheaper to go into a medical office outpatient building in an off campus environment. Except for if there's reimbursements."

Physicians have moved onto health-system payrolls. The share in private practice fell from 60% in 2012 to 42% in 2024, and 8 of the 10 fastest-growing service lines are outpatient (JLL, March 2026).

Consolidation answers reimbursement pressure. Larger systems negotiate stronger payer contracts and put capital behind the service lines that pay best. Jeff notes that "there's higher margin services like imaging, oncology, orthopedic spine, gastroenterology, cardiology, those are higher margin and have higher reimbursement rates." Vizient projects outpatient cardiovascular volume up 29% and neurosciences up 27% through 2036, and outpatient cancer volume up 20% against 2% for inpatient (Vizient projections, via AHA, August 2026).

Health systems are not only leasing space. They accounted for 57% of 2025 medical outpatient deliveries by square footage, while new starts by developers and operators are at half of 2019 levels (JLL, March 2026). When a system builds its own outpatient campus, its affiliated physicians in third-party buildings become candidates to relocate as their leases roll.

Payment rules shape where systems place care. The same CY 2026 rule pays for drug administration at grandfathered off-campus hospital departments at a site-neutral 40% of the hospital outpatient rate, an estimated $290 million cut in 2026 spending (AHA News, November 2025). When payment depends on location, a building's tenancy follows the system's decision to keep a service on campus or push it off campus.

The biggest risk in a building leased to one health system is correlated credit. If the hospital operator enters bankruptcy, the court has the power to reject the leases of affiliated physician groups, and the landlord is not assured of being made whole.

The second risk is a rival campus. When a competing system opens nearby, an affiliated tenant leaves with years of lease term remaining if the system's market strategy calls for it, regardless of the building's merits.

Average hospital finances offset neither risk. The all-payer operating margin rose 1.3 points in fiscal 2024, to 6.5%, close to its 2019 level of 6.7% (MedPAC, March 2026). That is an aggregate, and it says nothing about any one system.

We underwrite four points. Concentration: the share of rent that comes from one system and its affiliates. Strategic fit: whether the clinic is core to the system's local plan or a candidate for consolidation. Payer mix: a heavy Medicare and Medicaid mix leaves few systems willing to step in if the sponsor struggles. Proximity: where competing campuses stand today and where new ones are planned.

MARKET SIGNALS

Health systems lead leasing and building. Hospital systems signed 46% of 2025 medical outpatient leases and delivered 57% of new square footage (JLL, March 2026).

Outpatient outgrows inpatient. Vizient projects 20% outpatient volume growth over 2026–2036, against 7% for inpatient discharges (Vizient projection, June 2026).

Surgery keeps leaving the hospital. ASC surgical volume per Medicare fee-for-service beneficiary rose 3.5% in 2024, against a 1.3% annual average in 2019–2023 (MedPAC, March 2026).

Health systems signed 46% of the 2025 medical outpatient leases JLL tracked and delivered 57% of new square footage (JLL, March 2026). That makes them the most important tenant in medical outpatient buildings (MOBs) and their most direct competitor. New starts by developers and operators are at half of 2019 levels (JLL, March 2026).

Vizient projects that outpatient volumes will grow 20% from 2026 to 2036, against 7% for inpatient discharges (Vizient projection, June 2026). It projects office and clinic visits will rise 16%, to 2.87 billion, and hospital outpatient department and ambulatory surgery center volumes 15%, to 803 million (Vizient projection, June 2026).

The biggest risk in a building leased to one health system is correlated credit. If the hospital operator enters bankruptcy, the court has the power to reject the leases of affiliated physician groups, and the landlord is not assured of being made whole. The second risk is a rival campus that pulls affiliated tenants away.

The CY 2026 outpatient payment rule pushes more care out of the hospital. It begins a three-year phase-out of the inpatient-only list and adds 547 procedures to the list ambulatory surgery centers (ASCs) are permitted to perform. It also pays drug administration at grandfathered off-campus hospital departments at a site-neutral 40% of the hospital outpatient rate (AHA News, November 2025).

For informational purposes only. Not an offer to sell or a solicitation of an offer to buy any security; any offer is made only through confidential offering documents. Projections are not guarantees of future results.