Healthcare Office Sector Approaches the End of 2024 in Rude Health
While UK office market remains in a period of transition, among the various sectors, healthcare has been a standout performer. The first three quarters of 2024 saw the healthcare sector lease 340,099 sq ft across 45 deals in the Big Five regions (Bristol, Birmingham, Edinburgh, Leeds, Manchester) and Central London. If this pace continues, it could set a record high for the sector by year end.
Several significant deals highlight the healthcare sector's impact on the office market. For instance, Johnson & Johnson (Kenvue) leased 97,488 sq ft of Prime Grade A space in the South East, while Leeds Teaching Hospital NHS Trust took 43,731 sq ft of Grade B space in Leeds. Additionally, the NHS leased 30,161 sq ft of Grade C space in Bristol. These deals showcase the sector's diverse needs and the adaptability of office spaces for healthcare use.
Although healthcare's share of office leasing activity remains modest at 2.9%, its growth is nonetheless noteworthy and indicative of broader trends.
There are two separate drivers behind this uptick in office leasing activity from the healthcare sector: the growth of the healthcare sector leading to a higher demand for space, and the 2020 amendments to Use Class Regulations which enable office to healthcare conversions without the need for planning permission.
Healthy Demand
The UK healthcare sector has undergone substantial growth and transformation since the pandemic, which highlighted the need for enhanced healthcare infrastructure and preventive care, driving investment in public health initiatives. The first budget of the newly elected Labour Government allocated an additional £22.6 billion to the NHS, aiming to reduce waiting times and improve services.
Additionally, post-pandemic there has been a significant shift in how people view their health, with increased awareness and prioritisation of both physical and mental well-being. This behavioural shift, combined with difficulty accessing NHS services, has led to a growth in the size of the private healthcare sector. As detailed in the graph below from LaingBuisson, private healthcare revenue from hospitals and medical facilities in Central London alone has risen by 21% since 2019. In particular, increases in the revenue received from private medical insurance (14%) and self-pay customers (41%) evidence this trend of more health-conscious consumers turning to private healthcare amid constraints on the NHS. The UK is also attracting growing demand from international patients seeking high-quality medical services, with one analysis External Link projecting the UK medical tourism market to grow from approximately £24 billion to £96 billion over the next decade.
What does this shift mean for the office market? As the UK healthcare industry expands, so does demand for office space from healthcare organisation and firms. NHS funding increases will further boost its capacity to occupy more space, with similar effects anticipated from the growing private healthcare sector and manufacturers of healthcare products and equipment.
Change of use
To meet the increasing demands of consumers in the healthcare sector, some providers are leasing office spaces with the intention of repurposing them into medical facilities and practices.
The 2020 amendments to the Use Class Order established a new use class (Class E) that consolidates various commercial activities, and includes both offices and the provision of medical or health services. This change allows for greater flexibility in building use conversions without full planning permission, supporting urban revitalization and adaptive reuse of buildings. As a result, the amendment facilitates the conversion of offices to healthcare facilities by enabling property owners to repurpose spaces without extensive planning permission.
Thus, the increased flexibility afforded by the Use Class Order is allowing healthcare providers to lease and repurpose well-located offices to service the demand of a growing healthcare sector. Many office buildings are well-suited for medical use because they typically have ample space for waiting areas, examination rooms, and administrative offices. Additionally, office buildings are often located in areas with high foot traffic and good transportation links, making them accessible for patients. The existing plumbing, electrical systems, and heating/cooling infrastructure can also be easily adapted for healthcare use, reducing conversion costs. From a landlord perspective healthcare occupiers take longer leases on average, and provide good covenants. Where medical use is incorporated, this can add amenity in a mixed-use asset or development.
