Where Are All the New Medical Buildings?

MOB completions were 439,000 square feet in 2Q 2026, 76% below the five-year quarterly average and the fourth consecutive quarterly decline (CBRE, 2Q26). Across the 59 markets CBRE tracks, 2.7 million square feet of medical outpatient buildings (MOBs) were under construction, with Dallas leading at 356,000 square feet.

JLL reports that new starts by developers and operators are at half of 2019 levels, and that health systems accounted for 57% of 2025 construction deliveries by square footage (JLL, March 2026). A large share of what does get built is built by a hospital system for its own use, not offered to the open leasing market.

CBRE projects that new high-quality deliveries will slip into 2027 (CBRE Midyear Review, August 2026). That is a forecast, not a fact, and it points the same direction as the completion data.

Medical development is tenant-led, and that shapes the supply cycle. As Jeff Axley, Managing Principal, Ridgeline Capital Partners, describes it: "...supply is somewhat constrained by just, you know, escalated elevated inflation and construction costs, materials, labor, and generally these assets are purpose built, you know, so with a specific tenant in mind."

He contrasts that with property types where developers build first and lease later: "So you don't have the speculative excess and overhang that can occur with other property types like, I don't know, like say industrial, where you just kind of build it and they will come."

Speculative medical space is also hard to lease. Jeff's point is that a physician struggles to picture a practice inside a raw shell, so an empty shell building sits while the developer waits on tenant improvements.

Even tenant-led projects are hard to pencil today. JLL reports that rents on new MOB construction run at nearly twice in-place rents: over $40 per square foot for new buildings, against an average in the mid-$20s (JLL, March 2026). HCO News, citing JLL, reports an average all-in fit-out cost for medical outpatient space of $412 per square foot in 2026 (HCO News, March 2026).

That gap matters because physician groups are rent-sensitive. Jeff describes a common sequence: a developer prices rent to hit a target yield on cost, the general contractor comes back months later with higher costs, the developer reprices the rent, and the tenant no longer affords the deal. By his account, volatility in materials costs and interest rates has scuttled a lot of projects.

Some health systems pay new-building rents. JLL notes that the share of physicians in private practice fell from 60% in 2012 to 42% in 2024 (JLL, March 2026), so more doctors now practice inside health systems. Jeff's observation is that few systems will pay up for new space, and that independent physicians want cheap rent.

When new construction is expensive, an existing building bought at a discount to replacement cost has a structural advantage. The owner offers rents below what a new building needs, has room to raise rents over time, and gives tenants little reason to relocate.

We aim to buy at a meaningful discount to current construction costs. That basis lets us underwrite rents below new construction while still offering a quality building.

The risk in a replacement-cost thesis is that inflated construction costs flatter the purchase price. A discount to an inflated replacement cost is not a discount to market. CBRE reports an average MOB sale price of $307 per square foot in 2Q 2026, down from a peak of $374 in 3Q 2022 (CBRE, 2Q26).

Investors are right to push on this. The moat holds only if the building is one tenants want to stay in, in a location patients reach, at a going-in price that works against recent sales rather than against a construction estimate. A building that fails any of those tests has no moat, whatever a new one would cost to build.

MARKET SIGNALS

Completions are falling. MOB completions were 439,000 square feet in 2Q 2026, 76% below the five-year quarterly average (CBRE, 2Q26).

Starts are down. New starts by developers and operators are at half of 2019 levels, and health systems delivered 57% of 2025 new square footage (JLL, March 2026).

New space costs more. New-construction MOB rents run over $40 per square foot, against an in-place average in the mid-$20s (JLL, March 2026).

CBRE reports 2.7 million square feet of medical outpatient buildings (MOBs) under construction across the 59 markets it tracks, with Dallas leading at 356,000 square feet. Completions were 439,000 square feet in 2Q 2026, 76% below the five-year quarterly average and the fourth consecutive quarterly decline (CBRE, 2Q26).

Rents on new MOB construction run at nearly twice in-place rents: over $40 per square foot for new buildings, against an average in the mid-$20s (JLL, March 2026). Developers price rent to hit a target yield on cost. By Jeff Axley's account, volatility in materials costs and interest rates has scuttled a lot of projects for rent-sensitive physician groups.

Health systems build a large share of new medical office space, mostly for their own use rather than the open leasing market. JLL reports that health systems accounted for 57% of 2025 construction deliveries by square footage, and that new starts by developers and operators are at half of 2019 levels (JLL, March 2026).

Buying below replacement cost means paying less for an existing building than a new one would cost to build. The owner can offer rents below what new construction needs, with room to raise them over time. The risk is that inflated construction costs flatter the price: a discount to an inflated replacement cost is not a discount to market.

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.