By Brenda Nguyen CoStar Analytics
Medical offices have outperformed traditional office space in Philadelphia's commercial real estate market, though signs of deceleration have begun to emerge in early 2025.
Annual absorption, the net change in occupied space, contracted to 49,000 square feet in the first quarter of 2025, down from 185,000 square feet in the previous quarter. Although still quite healthy, Philadelphia’s medical office vacancy ticked up to 8.3%, rising 30 basis points from its seven-year low at the end of 2024.
Philadelphia's nationally recognized healthcare anchors—the University of Pennsylvania, Thomas Jefferson Health, and Children's Hospital of Philadelphia—have historically proven to be a stable base for Philadelphia's office sector, even during downturns. These institutions were behind several of the region’s largest medical office leases and acquisitions in recent years.
However, recent funding cuts at the National Institutes of Health, the federal medical research agency that funds much of the medical research conducted at universities, may weaken this foundation.
Greater Philadelphia secured $1.4 billion in NIH funding in 2023, ranking sixth nationally among 18 markets. Imminent funding cuts could indirectly impact medical office demand, as these buildings often benefit from healthcare research activities.
Beyond healthcare institutions, other organizations, such as the University City Science Center—a 50-year-old nonprofit supporting healthcare and life sciences startups—may also feel the effects of reduced NIH support.
Amid slowing demand, medical office rent growth has decelerated from an annual average of 1.4% at year-end to just 0.6% at the end of March.
With job growth expected to slow throughout 2025, demand for new medical office space may further weaken. Nevertheless, due to healthcare's essential nature and the region's strong institutional presence, the sector should maintain its relative resilience compared to traditional office space.
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