Plagued By High Development Costs, Medical Office Turns To Conversions

As of this year, 10,000 baby boomers are turning 80 years old every day — meaning doctors are starting to need a lot more space to accommodate a higher number of patients.

Healthcare landlords and developers have normally geared their acquisitions toward land where they could pursue ground-up development, which has historically been cheaper than converting existing properties, industry players said at Bisnow’s New York Healthcare Real Estate Conference.

But now, the cost of capital has flipped that dynamic on its head, leading developers, tenants and investors to explore turning obsolete commercial buildings into medical offices.

“There is a lot of excess office supply that can be retrofitted for a much lower cost than building ground up,” Cory Atkins, principal of healthcare real estate developer Atkins Cos., said onstage.

Medical office has emerged as one of the most resilient asset classes in recent years, according to Colliers. Medical office building vacancy stayed lower and stabler than office space between 2018 and 2025, while MOB demand has exceeded supply nationally by 4.7M SF since the pandemic.

Demand for medical offices has surged as the healthcare sector has expanded beyond the traditional split between physician offices and hospitals to a more diverse range of uses, industry players said onstage at 1334 York Ave., the former Sotheby’s building acquired by Weill Cornell Medical last year.

The increasing number of older Americans means there is more demand for hospital beds in inpatient facilities and for more specialized outpatient facilities, like orthopedic and cardiovascular practices. 

“The acceleration of ambulatory uses — the technology and the regulatory framework that is permitting more and more things to be done in an outpatient setting, in an ambulatory setting — is adding fuel to the fire,” said Joe Magliochetti, chief investment officer for Remedy Medical Properties.

But even as enthusiasm for medical offices climbs, the asset class has still been challenged by the rising cost of debt, combined with inflation and rapidly increasing construction costs.

“The interest rate spike over the last two to three years, it's made it difficult,” Atkins said. “Our biggest challenge, especially the last two years, was with the lack of debt that was available.”

That has required a rethink of the typical MOB development playbook.

Developers previously acquired vacant land to build entirely new properties or bought existing buildings to tear down, Magliochetti said. But now, future tenants can’t afford what the eventual occupancy costs would be for those projects, he said.

However, that dynamic means taking space in existing buildings and converting is becoming a new opportunity for medical office developers, tenants and investors. That has been amplified by the cratering of property values for offices.

“There's a lot of empty, or emptying-out, general office buildings,” Atkins said. 

While introducing medical office’s specific, complex and capital-intensive infrastructure requirements for different medical specialties into conversions can seem daunting, more companies are willing to take on those challenges.

One of Group PMX’s clients, a dental school building out space in a former Midtown mall, embodies those complexities, senior project manager Danei Wallen said.

That property needs plumbing infrastructure to bring water and vacuuming capacities to every patient chair and will need to reinforce floor plates so that cleaning equipment vibrations don’t penetrate patient-facing spaces.

But even complicated conversions are more worthwhile than ground-up construction in the current environment, Magliochetti said.

“If you can find the right bones in the building and it's in the right location, you can get it done for what ends up being the lower total project cost,” he said. “You can get it done more quickly to get to the first patient to pay more quickly.”

Demand for medical space is so high that developers are examining vacant big-box stores as conversion candidates, even though they have far less infrastructure than office properties, Memorial Sloan Kettering Cancer Center Senior Director for Real Estate Jeffrey Lynn said. 

“The attention and the attractiveness that empty big-box retail gets is largely warranted,” he said. “For the most part, these companies were located in high-traffic corridors. Ease of visibility, ease of access — there's a lot of positive reasons to be looking at and considering locations like that.”

Conversions are likely to continue to be the most attractive option for medical office developers and investors, Magliochetti said. Even if interest rates were to come down, construction costs, which have risen faster than inflation overall, will likely stay high.

“There is probably a durable scenario that we're dealing with where existing buildings, even if they're already occupied by medical tenants and you need to do a pretty extensive renovation or upgrade, it's always going to be more economical than any construction,” he said. “Certainly adaptive reuse, if you can find the right building, it's going to be an attractive alternative.”