Rising costs, shifting demand, and tighter access to capital are reshaping how healthcare organizations approach real estate. For many health systems, the challenge is finding ways to keep projects moving and facilities modernized without overextending budgets—a balancing act that calls for careful, forward-looking planning.
The New Reality of Rising Costs
Cost pressures are now a constant in the healthcare real estate market. Inflation, staffing shortages, supply chain issues, and rising operating expenses have narrowed margins, with many health systems operating at just 1–2% post-COVID—well below the 3% or more seen before the pandemic.
The impact isn’t just operational—it’s deeply tied to real estate decision-making. With higher interest rates pushing medical office building (MOB) cap rates to 6.9% in 2023, up from 6.2% the previous year, property valuations are declining while financing new projects becomes more expensive.
Even so, demand for outpatient and ambulatory care facilities remains strong. The need for care is still growing, driven by an older population, shifting patient preferences toward local services, and new ways of delivering treatment. That steady demand is keeping the market active, even as both investors and providers take a more cautious approach to where and how they commit funds.
Strategic Capital Planning Approaches
Real estate teams are finding they need to approach capital planning from several angles at once.
Portfolio Optimization
Space Utilization Review: Many health systems are taking a fresh look at their property portfolios, identifying locations that sit partially empty, consolidating services where possible, and reducing overall square footage. The result is leaner operations with lower costs for rent, upkeep, and utilities.
Asset Monetization: Properties that no longer serve core needs—or that consistently underperform—are being sold or repurposed. The proceeds can be redirected into higher-priority projects, such as clinical expansions or facility upgrades that directly support patient care.
Adaptive Reuse: As ground-up construction grows more expensive, health systems are turning to adaptive reuse of vacant retail, office, and industrial spaces. Reconfiguring existing buildings for medical use offers faster timelines and cost savings—often avoiding expensive materials and labor surges tied to new builds.
2. Innovative Financing and Partnerships
Sale-Leasebacks: Selling owned real estate while leasing it back provides an infusion of capital without sacrificing operational continuity. This method is gaining traction among systems needing to modernize facilities or reduce debt without initiating costly construction.
Third-Party Partnerships: Many health systems bring in outside real estate firms to take care of acquisitions, lease talks, or day-to-day property management. Offloading those responsibilities can cut costs and give leadership more breathing room to deal with patient care and bigger strategic priorities.
3. Cost Management Strategies
Facilities Management Optimization: For owned properties, keeping facilities management in-house supports consistency and cost control. Outsourcing non-core or transactional functions—like lease abstraction or brokerage services—frees up resources and enhances expertise.
Operating Expense Controls: Rising utility costs and service fees are being tackled through energy efficiency upgrades and contract renegotiations. Smart building technologies and utility audits are helping providers gain control over expenses that previously eroded margins.
Prioritized Capital Allocation: With budgets tight, projects are evaluated based on return-on-investment in both care delivery and operational efficiency. Outpatient expansions, urgent care centers, and tech-driven upgrades like telehealth infrastructure are top contenders for limited capital dollars.
Market Outlook: Challenges and Opportunities
Construction Starts and Occupancy: High construction costs have slowed new builds, which in turn is pushing up occupancy rates for quality existing space. This increased competition makes strategic leasing decisions more critical than ever.
Long-Term Demand Trends: While current conditions are challenging, the factors driving healthcare demand aren’t going away. More people are living longer, chronic conditions are on the rise, and care is continuing to move outside of hospital walls—all of which keep the need for medical facilities steady.
Risk Management Considerations: Planning also has to leave room for the unexpected. Changes in policy, reimbursement rates, or the economy can quickly alter the landscape. Systems that build in flexibility and keep a cushion for these shifts are better prepared to adjust without losing momentum.
Summary Table: Capital Planning Strategies
| Strategy | Description | Cost Impact |
| Portfolio Optimization | Consolidate, monetize, or repurpose underused assets | Reduces overhead |
| Sale-Leaseback | Sell property and lease it back to unlock capital | Provides immediate liquidity |
| Strategic Partnerships | Outsource non-core real estate functions | Reduces internal costs |
| Adaptive Reuse | Convert existing buildings for healthcare use | Avoids high new build costs |
| Facilities Management | Streamline in-house operations, outsource transactional tasks | Boosts efficiency |
| Energy/Expense Controls | Implement energy-saving and cost-reduction initiatives | Lowers operating costs |
Strategic Capital Planning Is Essential in Today’s Healthcare Real Estate Market
Healthcare real estate is undergoing a fundamental shift. The playbook that worked a decade ago is no longer sufficient. Health systems must now balance fiscal discipline with smart investments—opting for flexible, data-informed real estate strategies that enable them to thrive even under pressure.
At Healthcare Realty Group, we look at real estate as one of the tools that can help improve care, streamline operations, and strengthen financial stability. We work with providers on everything from portfolio reviews to sale-leaseback arrangements and adaptive reuse projects—always with an eye on solving today’s challenges while setting up for what’s ahead.
