Rx for commercial real estate investors: medical office space

Reuters recently noted that during the 2nd quarter of this year, commercial real estate activity in the US slowed to its lowest level in 15 years. Much of this is due to recession, job loss, and lack of demand for goods and services. This low level of activity is likely to last through the first 2 quarters of next year; Lawrence Yun, principal economist for the National Association of Realtors, suggests that recovery may be as far off as the last half of 2010.

However, there is a continuing bright spot in commercial real estate, and that is in medical office space. The main reason for this is that everybody needs health care. Also, our population ages, there continues to be more demand for doctors and medical facilities that closer to the residences of these aging seniors.

If you are an investor searching for a place to park your money, and you’re comfortable with a 7-8% cap rate for your initial years of ownership, then medical space will work for you. If you can get the permits and an 80% tenant commitment beforehand, you may want to build new space. This will average about $250 per square foot, because of the additional water pipes, electrical lines, and heating, cooling, and ventilating equipment necessary for medical buildings.

If you buy and convert existing space, make sure your costs after conversion remain within that $250 per square foot range, because the cap rate won’t change. So, while your refurbished building may look great, bear in mind that medical practitioners are business people, just like you. Physicians may see increased demand for their services, but they know what market rates are, and that is all they are willing to pay.

But once you have medical tenants they are likely to stay in that location for an average of at least 8 years. More important, successful medical practices will remain and expand if a landlord has additional space and if the costs to upgrade don’t bring rent into the stratosphere.

If you’re a physician, you may want to consider buying your own space within a medical condo; but beware the problems later on if you need to expand. You may have to buy someone else out at prevailing rates-- but you can do this only if space is available at the time.

A better idea if you are a doctor may be to purchase a building of your own and rent out the unused space to other physicians. Plot your own growth curve when you purchase. If you know you will need more space within 2 years, make sure the leases you write to tenants in spaces adjacent to yours run only that long.

If you buy a medical space you can either design from the ground up, or remodel the building based on sound medical office design principles. Create that extra waiting room space now. Design efficient filing and office space. Allot sufficient cafeteria room. Put in space for sufficient employee and patient’s rest rooms beforehand.

At the moment, there does not appear to be a downside to owning medical office space. Our population is increasing. People need medical care whether or not they are employed. The medical profession continues to add jobs because of these increasing needs. Therefore, medical office space is likely to remain a profitable place for real estate investment for many years to come.

Written by Marc Jablon, Realty Associates
Email marcjablon@yahoo.com - 561 / 213 – 6139
www.MarcJablonHomes.com