There are no sure things in real estate, but some kinds of investment properties come closer than others—particularly those that support essential 21st-century industries, such as healthcare and the public sector, to name the largest but not the only such industries. The wide range of real estate that supports these essential functions are known as necessity-based assets. They are no mere niche plays any more for investors, according to commercial real estate experts.
“Access to care is a huge consideration among healthcare systems right now, because the aging population is not only concentrated in metropolitan areas, but they're in suburban and rural areas too, and they all need to access to care,” says Robin Zellers, SIOR, chief executive at NAI CIR, referring to the clinics, medical office buildings, outpatient and specialty facilities that form the backbone of healthcare real estate in a time when demand is high.
“Medical real estate is somewhat immune to the kind of the macroeconomic disruptions we've had, since it is an ongoing requirement,” Zellers said, but investors still need to pay close attention. “They need to follow the nuances in their specific market as they relate to the healthcare systems involved. It's ever evolving.”
So is the wide array of public sector facilities, according to Daniel Wagnon, SIOR, principal and managing director at Structure Real Estate Services. Federal ownership gets the most attention, and periodically some federal assets are sold for conversion to other uses. But the need for properties remains high at all levels of government, including states and scores of small entities (special tax districts, for instance), school districts or public infrastructure.
“If you're an investor in government facilities, which is a tremendous niche and involves a tremendous amount of money, you're almost more of a lobbyist than you are a broker,” Wagnon says. “If you're not, then you're going to make some questionable investments.”
The Big Kahuna: U.S. Healthcare
In the private-sector economy, healthcare dwarfs everything else. In 2024, Americans spent more on healthcare than anything else except housing, roughly $3.3 trillion—much more than on food, cars, clothing, energy, recreation, or transportation, the Bureau of Economic Analysis reports.
Outpatient volumes nationwide are forecast to grow 10.6% and inpatient volumes will increase 0.9% over the next five years, according to the consultancy Advisory Board. Health systems are expanding their real estate footprint as a result, and either acquiring or contracting with physician groups to add specialties. Some 16,000 additional physicians became employees of a hospital system in 2022 and 2023, according to a report by PAI and Avalere. Health systems accounted for 46% of the 2.9 million square feet of leases signed in 2024 in its database, JLL reports. Specialty providers constituted 31% of the medical office space leased, with psychiatrists and behavioral health providers making up the largest group of these, accounting for 18% of this square footage.
Even if demand growth weren't so brisk, healthcare real estate would be a good bet, Zeller says.
70% of the times a tenant is relocating from one of these 'indispensable locations' involves things that that the property manager or landlord could control.
“It's a stable industry with very low turnover of tenants,” he notes. “Rental rates are relatively upper end, and the tenants are quality tenants with long-term leases, generally speaking.”
A good bet, perhaps, but not a sure thing. Healthcare real estate development is following demographics, but its role as necessity-based real estate is also impacted by the industry's competitive environment, which isn't always good for valuation. The struggle of rural healthcare is leaving a number of former necessity-based assets without tenants.
“I have acquaintances in the healthcare industry who describe it as a war zone,” Zeller notes. “Providers are jockeying for position geographically. For investors who are looking at long-term investments or where they're going next, they have to follow those trends. If you follow the news at all, you'll see that healthcare systems are in the midst of not just consolidation, but there are a number that are closing, so the larger systems are absorbing them or stepping in the place of systems they could not survive.”
Doctors and dentists are famously “sticky” tenants, meaning that they aren't as inclined to move as much as standard office tenants might be. Their patients are used to their location, for one thing, and some of the medical office buildouts, such as for medical records, can represent a significant investment in the space.
Sticky doesn't mean they won't consider a better offer, however, especially if the landlord-tenant relationship isn't all it could be, says Bryant Cornett, SIOR, president at Dudley Thomas Spade SRE.
“Having represented a number of health systems, and a number of physician groups, I'd say that 70% of the times a tenant is relocating from one of these 'indispensable locations' involves things that that the property manager or landlord could control,” Cornett says. “That is, if you consider their own actions under their control, such as not being a jerk to the tenants, or keeping the maintenance and building up to date.”
Leases structured to lead to equitable dealings with tenants are quite important, Cornett says, citing an example of a clinic landlord asking a tenant to pay a massive bill for updating the HVAC during the last 36 months of the lease term. "Was the lease constructed so that that was the responsibility of the tenant?" he says. "Yes. But in the spirit of fairness, is it fair to put a full cost of an HVAC reset on a tenant in the last months? Not really. The tenant moved. As often with any kind of real estate, a lot comes down to the particulars of the relationship between the landlord and tenant.”
Government Space
Healthcare might dwarf other private industries, but nothing outsizes the public sector. Federal space occupancy gets the most attention—most recently, in the haphazard efforts to downsize the federal workforce. In any case, the size of governments is staggering. The Bureau of Economic Analysis reports that as of Q3 2023 there was more than $10 trillion in annual total government expenditures, or about 36.2% of U.S. GDP. Without state and local expenses, federal spending is about 23% of GDP.
The need for a wide variety of properties thus remains at all levels of government, including states and scores of small entities such as special tax districts, school districts or public safety or infrastructure facilities. But the very size of the public sector makes being a government landlord a complex proposition indeed, made even more complicated by the current political climate.
A number of large players have developed expertise in the sector and remain optimistic. “DOGE is focused on shifting the government’s real estate strategy, moving the government away from its traditional model of owning its office space and toward a more flexible leased model to drive cost efficiencies,” said Daryl Crate, President and CEO, Easterly Government Properties, during the company's most recent earnings call in late April. “Easterly is uniquely positioned to benefit.”
The company doesn't rely completely on federal contracts in any case. One of Easterly's most recent deals was the acquisition of a 290,000-square-foot facility that is almost completely leased to the District of Columbia government, which recently extended its tenancy through 2038 with renewal options.
“Under new mandatory return to office policies, the facility is consistently occupied at high levels,” Crate said. “This acquisition aligns perfectly with national trends of decentralizing education oversight to the state and local level, ensuring strong stable demand for this property going forward.”
Easterly also recently was awarded a contract to develop a 40,000-square-foot federal courthouse in Medford, Ore., under a 20-year lease. The facility will house U.S. Senate offices, a U.S. Marshal Service office and U.S. attorneys offices, and a probation office all under the same lease. Crate called the public sector “mission critical”—necessity based, in other words.
For real estate investors operating in the public sector, the focus has to be exceedingly localized and granular, Wagnon says. “You have to understand how funding works, where the funding is coming from,” he says. “You've got to understand what's going on each and every year in the legislature of the state you're looking to invest in, and how that's affecting these facilities.”
Policy changes have a way of changing real estate use, sometimes making properties a little less necessity-based. Wagnon recalls that the Florida legislature decided in 2010 that, except for Miami-Dade, Broward and Volusia counties, local tax collectors would take over DMV drivers license and license plate transactions. DMV offices statewide closed by 2015, while county tax collectors expanded their footprints.
“That's a critical component, right?” Wagnon says. “People need driver’s license locations. The state pushed about 90% of them to the local tax collectors. So now you go to the tax collectors to get your driver's license, or firearm permits or tags or whatnot for your vehicles, boats and a lot of other things.”
The change affected investors who owned facilities that had DMV locations —many of which were single tenant driver’s license facilities, Wagnon says. Investors who aren't following policy changes risk being blindsided, and may end up hearing about it from investors within their funds or within their client base.
Other Necessity-Based Assets & A Cautionary Tale
Healthcare and government real estate assets aren't the only ones that can be called necessity based. Though not serving economic sectors as large as those two, they are arguably quite important —among them data centers (associated with the tech industry), grocery-anchored retail (consumer products) and cold storage (logistics).
Long ago, leaving their niche status, data centers have evolved into a major property type, serving as the lifeblood of the digital age. At the end of 2024, a record 6,350 MW of data centers were under construction in major U.S. markets, more than double the amount under way (3,077.8 MW) a year earlier, according to CBRE data. Demand, much due to AI, is driving the surge.
Grocery-anchored retail is another necessity-based asset that is doing well. Limited supply additions in recent years due to elevated construction costs, combined with strong demand for grocery-anchored shopping center space, have pushed vacancy to new lows, according to JLL. At the end of 2024, grocery-anchored retail vacancy came in at 3.5%, 10 basis points below Q4 2023 and 100 basis points below pandemic-era peak of 4.5% in Q2 2021.
Investors have long been interested in grocery-anchored retail and remain so. Despite capital market challenges, investment in grocery-anchored retail properties in 2024 topped 2023 levels by 1.4%, JLL reports. Last year grocery-anchored retail transactions totaled $7 billion.
Cold storage still counts as a niche play, but an important and growing one, necessary in its support of the food and beverage industry and pharmaceuticals. Food companies are expected to consolidate inventories into more efficient and larger facilities to improve logistics and meet consumer demand, according to a report by MetLife Investment Management. The aging U.S. population is also driving demand, mainly for storage related to medicine.
Other real estate sectors might be called necessity based, including financial industry assets, last-mile distribution, and advanced manufacturing —including life science assets. Call centers, by contrast, are increasingly less necessary to the way American companies do business. While still an active sector, tech changes are afoot that will probably render the property type a case study in how a formerly important class of necessity-based assets became marginal.
That is because AI is going to be doing a lot —if not most—of the work human call center employees now do, and the humans that remain in that industry will be less concentrated as the tech allows them to work at home. The global AI market in the call center sector is currently about $2 billion, but it is a high-growth sector, with the market for AI call center products anticipated to exceed $10 billion by 2032, reports Fortune Business Insights.
“I was trying to call Delta because my son was traveling overseas, and they lost his bag for a week, and in literally over 25 attempts, I never got a chance to talk to a human,” Wagnon says. AI was consistently at the other end of line, a trend he expects will continue, impacting call center space in markets like Jacksonville, Fla. where he is active.
“Jacksonville used to be a call center-heavy market because its demographics included military spouses,” Wagnon says. “They weren't looking for a long-term career, just something to bridge three to five years. But now you have these large, wide open bay spaces that just either remain vacant or whose owners are starting to reutilize their space. You just don't see the call center model as much anymore, because AI is taking over.”
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