When Clinical Rents Hit $40, What Gives?

At $36–$40, that framework breaks down. For hospital systems that historically planned real estate on 100-year horizons, the underwriting lens is shifting from "Can we replace this asset?" to "Which specific programs can survive in this rent band?" Scrivner notes that health systems have traditionally acquired land in growth corridors, "planting a flag" for future campuses.

Now, the decision to move forward on a building in those locations depends on whether high-acuity, high-margin service lines—such as surgical, imaging or specialized outpatient procedures—can anchor the rent, with lower-margin primary care and diagnostics following only when the numbers work.

This is pushing underwriting conversations down to the service-line level. Instead of treating occupancy as a blended system expense, executives are assigning tighter profitability targets to each program housed in a new facility. Higher-acuity tenancies that can support $65–$70 surgical rents are being prioritized, while lower-yielding uses are increasingly steered into lower-cost, non-core locations or existing space brought up to standard through renovation. The result is a more segmented real estate strategy that aligns space quality and cost with the revenue profile of the services delivered there.

Redevelopment, not retreat

Despite the squeeze, providers are not stepping back from growth. They are changing where and how they grow. One of the clearest shifts Scrivner identifies is a renewed focus on adaptive reuse as an alternative to ground-up development. For systems and large groups that "can't afford the cost of new construction," he says, "the best opportunities right now" are existing office or retail properties that can be converted at a basis and cost that is below construction."

Scrivner points to a target profile: assets that can be acquired at or below $100 per square foot, with an additional $200 to $225 per square foot invested in conversion, depending on acuity. Even at those levels, he argues, "you can still come in well below what it would cost you if you're building a new construction," while also cutting time to market by avoiding a year or more of architecture, zoning and permitting.

That time arbitrage matters in an environment where capturing patient demand and locking in physician alignment may be as important as shaving a few dollars off rent.

For investors and developers, this tilt toward redevelopment changes the underwriting landscape. Deals that once followed a uniform path to new build are now competing with a broader set of options, including mixed-use properties where providers take a portion of the asset for clinical conversion and leave the remaining space for non-medical uses.

Capital stacks are evolving as well, with joint ventures between systems and capital partners structuring rent and return expectations around both the lower basis and the operational complexity of medical retrofits.

Inside the "shadow rent" conversation

The underwriting reset is also playing out internally, especially in employed physician models where the cost of space is often embedded in compensation structures. In many systems, physicians have historically been insulated from the true cost of their occupancy, with internal "shadow rent" charged at levels reflecting legacy leases rather than current market or replacement costs. With external rents now resetting, that insulation is harder to sustain.

Scrivner worries that as health systems aggregate practices, the industry may "lose innovation" that has traditionally come from entrepreneurial physicians, even as the cost of care continues to rise. Raising internal rent assumptions to align with $36–$40 clinical and $65–$70 surgical rates risks widening the gap between system-employed and independent practice economics, unless it is accompanied by changes in program mix, productivity expectations or downstream revenue sharing.

In practice, that is driving more granular discussions around how internal rents are set, how space is allocated and how those charges interact with physician compensation and EBITDA targets. Systems are revisiting whether certain high-performing service lines should receive more favorable rent treatment to support growth, while lower-margin, lower-productivity programs are asked to either consolidate, relocate or redesign their footprint.

For groups that still own their real estate, the decision to sell, recapitalize or hold now hinges on whether they can leverage that ownership to maintain independence or whether unlocking capital is more valuable than the control that comes with being a landlord.

Scrivner's core message is that real estate has become a more active lever in that strategic mix.

"Your real estate is just a tool," he says, and it can be "leveraged" in different ways—owned, monetized, or used to expand footprint—depending on whether the goal is to remain independent, grow, or prepare for an eventual sale at a higher EBITDA multiple.

In a $40-rent world, the assumptions behind that tool are being rewritten, and the providers that move fastest to realign program economics, occupancy cost and internal incentives are likely to be the ones that keep control of their own story.