CRE's Healthiest Asset Class? Chicago MOBs Are Surging

Medical office in Chicago is booming. 

The asset class is back to its heady prepandemic days as capital feels comfortable betting on a market with a stable of powerhouse health systems looking to expand and tenants that renew leases at a high clip. 

MOB’s strong performance is also buoying other corners of CRE, as the redevelopment of former retail, industrial and traditional office space breathes life into struggling sites. 

“Chicago is still a prime market for a lot of folks,” said Brian Howard, founder and president of Stage Equity Partners.

At 61M SF, Chicago has by far the most MOB inventory of any of the cities CBRE tracks.

And it is growing the fastest. The area led the country with 912K SF of MOB space delivered in the last four quarters, followed by Charlotte with 505K SF and Raleigh with 300K SF, according to a second-quarter CBRE report. 

Chicago was the only locale to eclipse 1M SF of net absorption over the same period. 

That has kept fundamentals steady with vacancy largely unaffected, CBRE Vice Chairman Jon Springer said. Rising construction and build-out costs have made renewals more attractive than relocations, keeping tenants in place as long as terms match market conditions.

Investment sales are also rising. There are more MOB properties on the market this year than there were in 2024, and those properties are of higher quality, said Jay Heald, managing partner at Capital Healthcare Properties. Heald said he was touring four buildings on Friday that are part of a portfolio for a large healthcare REIT, and buyers are getting more comfortable with asset pricing.

“There's definitely a lot more momentum right now than there has been the last 18 months or so,” Heald said.

The market features one of the most competitive healthcare landscapes in the country, with several nationally ranked systems and hospitals, including Northwestern, Rush, UCM and Advocate, Springer said. 

Those entities are growing their footprints to meet demand from an aging population and increased appetite for outpatient care, and their strong financial makeup is appealing to financial backers, Springer said. 

“The credit of the top Systems here are tough to beat nationally, and capital deployment typically puts a premium on credit and location,” Springer said in an email.

Chicago is back to a perch it held in 2019, when it led the nation’s medical office sector with about 915K SF of net absorption. 

Springer said most of the new development coming online is single-tenant leased or owned assets or are anchored with a low amount of available space.

Take Northwestern Medicine’s new $100M outpatient center that opened Wednesday in Bronzeville, a five-story, 120K SF facility that has been in the works for four years.  

A developer hasn’t broken ground on a speculative MOB in “quite some time,” Springer said, because the risks are too great.

Instead, some developers are turning to build-to-suit and adaptive reuse to meet market demand.

RX Health & Science Trust acquired a former grocery store property in Naperville in an off-market deal in fall 2021, said Jesse Ostrow, the company’s chief investment officer. RX Health & Science converted the building to an MOB and leased the 40K SF building to Advocate Healthcare. 

Ostrow said the conversion allowed Advocate to pay significantly less in rent with a faster speed to market compared to new construction. The company sold the stabilized asset to LaSalle Investment Management’s core fund in March while retaining property management.

“It demonstrates that major global investors still desire to be in the Chicago market for core, stabilized, attractive buildings in the Chicago suburbs,” Ostrow said.

The opportunities Heald has been working on lately have largely been adaptive reuse, as ground-up construction is as hard to pencil in MOB as it is in other asset classes. Heald said he has primarily worked on retail conversions, including fitness centers, strip malls, grocers and a former dealership.

Though office seems like an easy conversion opportunity given the amount of vacant space in the market, it’s harder to convert to a medical use than it seems at first glance, Heald said. Most buildings aren’t fully vacant — a key roadblock for many medical tenants — and even when they are, infrastructure, ceiling heights and floor layouts often don’t meet medical requirements. 

“Very, very few of them work in reality,” Heald said. “It can be, but it's more of a diamond in the rough.” 

While office and medical office can often get lumped together by the general CRE population and certain loan committees, the fundamentals in the space are quite different, Ostrow said. Medical office tenants renew their leases at a higher clip than regular office tenants, command higher rents and often invest more in build-outs, which makes moving on from a space costlier and less likely. 

CBRE expects healthcare real estate to continue to grow in the Chicago area, Springer said. Demand for existing and new services will rise, and as systems continue to compete for patients, physicians and downstream revenue, there will be consolidation into larger multispeciality sites and renewal on well-performing existing sites, he said. 

Howard said the mix of users in the Chicago market, including nonprofit systems, large physician groups and independent physicians, sets the area up well for future growth. 

“We have a really broad, deep, healthcare-driven market,” Howard said. “You will be seeing some expansion. You will be seeing some new developments.”