January 24, 2019
When landlords think of leasing to medical users, they may have nightmares of wailing kids and ambulances, floors strewn with tissues and cough drop wrappers, and electric meters running at top speed. However, these visions are rarely the reality, and a wellness-focused tenant may be the right prescription to relieve slowing revenue and leasing pains.
There are many benefits to having a healthcare practice as a tenant in an office property. Namely, medical tenants will often sign long-term leases, and they have a high renewal rate, averaging 85 percent. Before leasing to a medical tenant, there are a few symptoms landlords should check to see if it’s a good fit.
- What is the practice specialty? One of the first concerns likely to come up is an increase in building visitors who are ill, but there are plenty of physician practices that treat patients who are not at risk of spreading sickness. It’s vital for building owners to fully understand the patient mix to identify any potential issues that might result from placing medical and office users together.
Family or general psychiatry is a medical subspecialty that is well-suited for an office building. However, landlords should inquire about group counselling sessions, the types of therapy offered, and hours of operation. There are many other medical specialists that landlords could consider for a traditional office setting, including ophthalmology, neurology, pulmonology, cardiology, general surgery, orthopedic surgery, endocrinology and dentists. As another example, physical therapy groups treat patients who are not at risk of spreading illness, but these practices are best-suited to space on the first floor. The treatments can create vibrations and noises that could potentially disturb surrounding office tenants, and they may use heavy hydration therapy tanks. First-floor space can address both of those concerns, as well as cater to the mobility issues of many patients.
- What is their payor mix? In other words, how are their patients paying for their services? If a doctor is receiving private insurance or cash payments, you can expect a higher level of clientele in and out of their office. If a doctor is receiving mostly Medicaid payments, be prepared for higher volumes of patients and for public transportation drop-off and pick-up, which can crowd building lobbies.
- How many patients do they see per day? High-volume medical groups, such as pediatrics, family medicine, internal medicine and allergists, need an abundance of parking and can generate unwanted building traffic. Office landlords may instead want to focus on plastic surgeons, chiropractors, dentists, and general surgeons, which tend to see fewer patients per day. While a typical medical user needs a five per 1,000 square feet parking ratio, it’s important to remember that all practices are different and to hone in on the number of employees and their specific patient volume when considering a medical tenant’s parking requirements. For buildings with a pay-per-visit parking structure, patient traffic could be a valuable revenue source.
- Do they perform medical procedures in the space? This issue should not be a deal breaker because procedures completed with local anesthesia are common and don’t require any special infrastructure. Example procedures include colposcopy, root canal, removing an ingrown toenail, hernia repairs, and minor dermatology procedures. If a physician wants to perform surgeries in the space the practice will most likely build out a fully accredited ambulatory surgery center (ASC). ASCs are very costly to construct, typically reaching higher than $250 per square foot, and the space would need to meet a series of requirements from the state. Attracting an ASC tenant can be highly lucrative for building owners, as the user will likely lease a substantial amount of space to meet code requirements and stay at the property for many years due to the significant upfront investment.
- Do they have any specialized equipment? Surprisingly, physician practices typically use a comparable amount of power to a regular office tenant, unless they need specialized equipment or supplemental HVAC units. They will require more plumbing and millwork than an office tenant, but advances in technology have drastically simplified the medical equipment used in today’s practices.
Office owners should recognize the intense investor interest in medical properties, which are seeing some of the lowest capitalization rates in decades. In fact, many experts and investors now consider healthcare real estate a safer investment than office. A strategic mixed-use property could generate higher revenues and attract a better buyer pool than that of a strictly traditional office building. Savvy owners should work with a real estate firm that can create a specialized team of office and medical experts to prescribe the best strategy for attracting the right medical tenants.
– By Ashley Cassel, CCIM, Senior Vice President – Healthcare Advisory Services, Transwestern