Healthcare Real Estate Gains Momentum as Demographics Drive Demand

Written by:

Steve Marcinuk

Date:

05 Jan 2026

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The healthcare real estate sector is undergoing measurable changes as demographic shifts and new care models reshape demand and investment strategies. Arizona, with its large retiree population, offers a clear view into these trends, illustrating both the opportunities and challenges facing the industry nationwide.

Arizona’s healthcare real estate market demonstrates how an aging population is increasing demand for medical services, while broader economic uncertainty is prompting investors and operators to be more cautious. The state’s high proportion of retirees creates a consistent need for medical, senior housing, and behavioral health facilities, but also highlights the risks of shifting funding sources and regulatory requirements.

Market Activity Slows as Due Diligence Increases

While transaction activity in healthcare real estate has slowed compared to previous years, the sector remains relatively stable. Buyers and sellers are taking more time to evaluate deals, with particular attention to funding sources and possible regulatory changes. This increased caution is especially noticeable for properties reliant on federal funding. Yet, Andie states that there is liquidity in the market. “There is still an appetite, and there is money; the investors are just valuing thoughtful due diligence.”

“We’re finding that when we talk to potential buyers, the concern is some of the funding,” says Andie Edmonds, Senior Vice President at Colliers, specializing in healthcare real estate. She notes that nonprofit facilities with a mix of private and federal funding face extra scrutiny. “Media coverage of changes happening in DC creates concern,” Edmonds adds.

As a result, landlords are conducting more thorough reviews of tenants who depend heavily on federal programs, while investors request detailed breakdowns of funding sources and sustainability. This extended due diligence process has become the new standard, particularly for deals involving skilled nursing, assisted living, or behavioral health operators.

Senior Housing Faces Supply Shortages and Changing Expectations

Senior housing is at a critical juncture. Construction of new facilities nearly stopped in 2020 due to the COVID-19 pandemic, just as the first wave of baby boomers approached the typical entry age of 80 for assisted living. This pause has left the market with a shortage of available properties and created a mismatch between supply and growing demand.

Today’s seniors entering assisted living often come from active 55-plus communities with extensive amenities. They expect similar engagement opportunities in their new residences. “Even though they might be in an assisted living community, they still want active things going on. They want art classes, and they want to learn how to use the iPhone and text their grandkids,” Edmonds says. “They’re coming out of very active communities, but now maybe need some extra help at mealtime or with medications.”

Operators are responding by updating existing facilities and designing new ones with more amenities, pursuing a model that blends care with lifestyle experiences. However, the supply shortage persists, creating upward pressure on occupancy rates and, in some cases, rents.

Property Conversions Expand Options for Care

Owners are converting older facilities to serve different market segments. Outdated properties that once catered to higher-income residents are being repositioned for lower-income and middle-class seniors. Meanwhile, developers target affluent retirees with new projects that offer upscale amenities and a more active lifestyle.

A notable trend is the conversion of former senior housing properties for behavioral health uses. These buildings are being repurposed to provide inpatient behavioral health services, transitional housing after drug or alcohol treatment, and residential programs for eating disorders or other conditions. Because residents typically stay for defined treatment periods rather than permanently, these properties can be adapted efficiently to meet new needs.

“There’s a rising demand for residential or inpatient behavioral health that we just haven’t really seen in the past,” Edmonds says. She notes that investors are increasingly interested in these conversions, though many are still cautious. “They’re trying to figure out how this works—how do these operators make money, where does the funding come from, what does the insurance look like?”

Small-Scale Care Models Gain Popularity

The growth of small-scale group homes is another significant trend. These are large homes in residential neighborhoods that serve four to six residents. This model appeals to families seeking more personalized care and can sometimes access more favorable funding or insurance programs.

Small-scale facilities offer a home-like environment and individualized attention, addressing both consumer preferences and practical financial considerations. They represent a shift from large institutional settings to more intimate, community-based care.

Investment Patterns and Cap Rates

Despite slower transaction velocity, healthcare real estate continues to attract strong interest from investors, especially family offices and smaller investment groups targeting properties under $20 million. The sector’s cap rates—often around 8% for behavioral health and other less traditional healthcare assets—are attractive compared to lower yields in industrial and retail real estate.

“Healthcare investors tend to invest in healthcare,” Edmonds explains, referencing the specialized knowledge required. However, she has observed increased investor curiosity among those who previously focused on other asset classes. In markets like Phoenix, where demographics strongly support healthcare demand, new entrants are evaluating medical and behavioral health properties as part of a diversification strategy.

Medical Office Properties Remain Strong

Traditional medical office buildings continue to perform well, supported by demographic trends and evolving healthcare consumption patterns. The aging population and a shift toward more proactive, preventive care are driving consistent demand for medical office space.

People are increasingly seeking preventive care—addressing health concerns before they become serious—which sustains demand for facilities serving established physician groups and healthcare systems. Medical offices with strong tenants and prime locations remain exceptionally resilient, with stable occupancy and steady rent growth.

Outlook: Key Trends to Watch in 2026

Looking ahead, several trends will shape healthcare real estate through 2026. The direction of senior housing development—including facility size, location, and amenity offerings—will set the tone for future projects. The ongoing evolution of behavioral health facilities, both inpatient and outpatient, represents a growing opportunity as mental health services gain wider acceptance and insurance support.

The sector’s future will be defined by the intersection of demographic pressure, new care models, and shifting funding landscapes. Investors and operators who understand the complexities of healthcare funding, regulatory requirements, and changing consumer expectations will be best positioned to capitalize on market opportunities.

Healthcare real estate is likely to remain one of the more stable and attractive segments of commercial real estate, even as uncertainty affects other asset classes. However, success increasingly depends on specialized knowledge. Investors and operators must navigate a complex web of funding sources, state and federal regulations, and evolving tenant and patient needs.

In summary, demographic trends are creating sustained demand for healthcare and senior living properties, even as investment approaches and care models adapt to new realities. The sector’s stability and growth potential offer significant opportunities for those prepared to engage with its unique challenges and requirements.