'Slow And Steady' Won The Race As Greater Philadelphia Led Nation In MOB Absorption Last Year

Demand for medical office buildings was up just about everywhere last year as healthcare providers deprioritized overnight hospital stays and emphasized bringing services to neighborhood settings.

But no market absorbed quite as much as greater Philadelphia.

The region saw roughly 650K SF of net MOB absorption in 2024, according to a new report from JLL. That puts it far ahead of the next-largest markets in Houston and Atlanta, which both posted slightly more than 400K SF of absorption last year.

Percentagewise, metro Philly absorbed just under 2% of its MOB stock last year, making it the No. 6 market nationwide and No. 3 among non-Sun Belt metros.

The sector also saw 70 basis points of rent growth year-over-year even as the metro's overall office rents fell by 30 basis points.

“There isn’t a big splashy reason,” JLL Philadelphia Research Manager Emily Friedman told Bisnow of the local MOB trend. “It’s kind of just slow and steady.”

The strong numbers can largely be attributed to a long series of small leases, many of which were less than 5K SF, Friedman said.

But there were also some sizable transactions last year, including a roughly 37K SF lease inked in June at the University of Pennsylvania’s 3535 Market St. office building, according to JLL data. The month prior, a tenant signed a 10K SF lease at 405 Hurfville Cross Keys Road in Washington Township.

The region is benefiting from broader changes in the healthcare sector, said Transwestern Managing Director of Healthcare Advisory Services Cheri Doyle.

“There’s a big push to move services to the outpatient arena,” she said. “The shift really started in the late 1990s and early 2000s.”

That can partly be attributed to changes in the insurance industry, which has traditionally offered higher reimbursements for inpatient care, Doyle said.

“The whole industry is trying to change that, to make it so that hospitals are incentivized to actually move services out and into the community,” she said. “They’re trying to get more progressive about the way they pay to lower costs … It’s more of a managed-care model.”

The rise of part-time remote work continues to be a big boon for MOBs, Friedman said. Workers often schedule medical appointments for days when they’ll be at home and usually don’t want to travel far.

“Providers are really going to where their patients are,” said JLL Senior Vice President Matt Davis. “These health providers are really smart on where these locations need to be … It’s even as granular as understanding drive times.”

Demand for MOBs is high in Philly, but that doesn’t mean the region should expect an outpatient construction boom anytime soon. Despite its top-tier absorption, greater Philly didn’t crack the top 10 list for MOB construction starts in a Colliers report.

“The current capital markets combined with high construction costs has kind of slowed down some of the ground-up healthcare development in all areas,” Davis said. “What we are seeing is adaptive reuse, which has been positive for the suburban market.”

Suburban Philadelphia’s large stock of underutilized office buildings could be good candidates for conversion, he said. 

But Doyle said the redevelopment process is often more complicated than it seems at first glance, especially since many medical tenants need highly specific layouts and design features.

“In terms of cost savings, it really doesn’t yield much,” she said. “The cost to convert ends up equaling the cost to build new.”

While agreeing, Davis said there are still circumstances where conversion makes sense: Rising demand for mental healthcare offices is one trend that could easily be accommodated through repurposed office buildings.

Philadelphia isn’t the only Pennsylvania market that stands out in the MOB sector.

The Scranton area was the third-most active MOB sales market in the nation last year with roughly $500M worth of transactions, according to the Colliers report. That put the region behind only Phoenix and Atlanta and ahead of much larger markets like Los Angeles, Minneapolis and Dallas.