Tips for Investing in Medical Buildings

Given the social impact of COVID-19 and other recent worldwide events, it is no surprise that investors seek medical office buildings as a bankable, essential asset class. In addition to the relative stability these investments offer, the number of outpatient centers across the U.S. continues to increase as patients desire more convenient and more affordable access to healthcare. Here are considerations that make medical office buildings a promising investment.

1. Retention of Tenants is RegularDoctors stay at a location that suits them well because relocating usually results in a loss of 10 to 20 percent of their patient base. Furthermore, with heavy, expensive build out costs, many tenants would prefer not to move after their lease expires. When considering this property type, don’t be deterred by a shorter-term lease. Doctors prefer to renew than relocate provided their landlord is reasonable.
2. Medical Office Building Tenants Usually Maintain Strong CreditAlthough every tenant is unique in their own way, medical office building tenants tend to have strong credit. This is great for attracting other high-credit, long-term tenants as many healthcare providers prefer to be near complementary services. Medical synergy is often the reason medical professionals chose an office location.
3. Rental Rates Are Higher Than a General OfficeSmart buildings are taking over the commercial real estate industry and the healthcare sector is no exception. With changes in medical technology advancements, there could be a higher tenant improvement cost for the build out. Tenant improvements amortized into a lease rate increase the rental rate and the overall building value. In general, rental rates for medical office buildings are usually higher than a general office due to the cost of tenant improvements.
4. Low Risk Factor for the InvestorDepending on the practice size and how many doctors there are, the lease often includes more than one personal guarantee. A personal guarantee is an unsecured guarantee with no specific piece of property to be used as recourse. By having a personal guarantee in a commercial lease contract, the tenant is putting their own personal property at risk. With more guarantees occupying the lease, the risk factor is lower for the investor.
5. Commercial Banks Consider Medical Professionals BankableWhen underwriting a loan, commercial banks want to ensure that the property creates cash flow beyond the mortgage and the investor can cover all operating expenses. Commercial banks often consider medical professionals highly bankable which helps the investor secure a fair market loan.