Medical office demand slips further across Philadelphia

 

By Brenda Nguyen CoStar Analytics

Philadelphia’s medical office market — long considered one of the more resilient commercial real estate segments — shows signs of tension in 2025. After years of outperforming traditional office properties, the sector is experiencing a contraction in demand.

In 2024, Philadelphia’s medical office absorption totaled 300,000 square feet, but by mid-2025, that figure had swung sharply into negative territory to -232,000 square feet. Projections suggest another 74,000 square feet will be vacated before the end of the year.

As a result, the vacancy rate has increased to 8.6%, a 50-basis-point uptick from its seven-year low at the end of 2024.

This downturn has come despite reasonably steady leasing activity, with nearly 85 new leases signed in the year's first half. However, those deals have tended to be smaller, with average lease sizes dropping roughly 10% from late-2024.

The shift reflects a change in occupier behavior as healthcare providers adapt to slower regional job growth, tighter operational budgets and shifting patient volumes.

Adding to these pressures, Philadelphia’s smaller hospital systems have reported operating losses in recent quarters, according to a review by the Philadelphia Inquirer. Ongoing consolidation among healthcare networks has also contributed to the problem, reducing redundant facilities and centralizing administrative functions.

The most significant hit came earlier in 2025, when Prospect Medical Holdings, the parent company of Crozer Health, filed for Chapter 11 bankruptcy. Years of financial instability — exacerbated by lingering COVID-19 effects, inflation, a major cyberattack and rising insurance denials — culminated in a court-approved plan to close facilities and sell off remaining assets. The Crozer collapse has reverberated across the local medical office market.

The transition has strained care delivery, disrupted physician placements and forced many patients to seek new providers, all contributing to a short-term dip in demand for medical office space.

While medical office properties have historically outperformed traditional office assets due to their specialized nature and stable tenant base, the current environment suggests that even this niche is not immune to disruption in the near term.