By: Kenneth Smondrowski, Joseph McCormick and Michelle Castro
October 05, 2023
To fill a glut of office vacancies, building owners are more willing to expand leasing opportunities to medical tenants. They understand healthcare providers are sticky – once they build out the practice and establish a patient base, they are more likely to renew and grow in place. At the same time, healthcare users are enticed by high-quality office availability at cheap rates in prime areas where medical office buildings are lacking.
Healthcare specialties, such as mental health, ophthalmology and chiropractic, generally fit nicely in a traditional office building. However, office buildings are not equipped to handle the infrastructure requirements for most medical practices, like dentistry, oncology, dermatology and orthopedics. And, converting traditional office to medical space is not as simple as it sounds, nor does it work in all situations.
Before embarking on a journey to fill vacant offices with medical tenants, owners and users must understand the key factors and issues that can arise.
Zoning and Regulatory Compliance: Medical facilities are subject to specific zoning and regulatory compliance for building codes, fire safety, and accessibility, as well as policies related to patient safety, privacy and infection control. Also, certain states have Certificate of Needs laws governing ambulatory surgery centers.
Specialized Infrastructure: Medical tenants typically need specific gas lines and electrical frameworks, plumbing for sinks and drainage, and HVAC systems capable of maintaining temperature and humidity levels. Older office buildings run into issues accommodating large, heavy equipment that demands special loading docks, reinforced floors, and elevators. Low ceilings and inflexible floorplates can be problematic.
Space Planning and Build Out: Examination rooms, patient waiting areas, nurse’s stations, and surgical suites unique to medical spaces must be factored into space planning. The space must also be optimized for efficient workflow and patient care.
Buildout costs in office buildings can be higher if significant modifications to the existing infrastructure are needed. In a recent buildout, Transwestern’s plastic surgery practice client was forced to rebuild an office building’s plumbing and drains to accommodate existing air ducts, pipes and chaise spaces and meet city code for drainage and sewer lines.
Noise and Privacy: Privacy and soundproofing to maintain patient confidentiality and comfort are essential for medical tenants. Office buildings may also have noise restrictions for tenant spaces or common areas. Transwestern’s medical client encountered an uncommonly low noise standard during a buildout, requiring encapsulating 17 sink drains and a toilet in a soundproof drywall and hard case. The work involved conducting additional radar drills to ensure construction didn’t breach post-tension floors that had been poured and caused hefty cost and timing overruns.
Infection Control and Sterility: Isolation rooms, sterile environments and air filtration systems are critical in clinics, which can be expensive and challenging to retrofit into an existing office building. Medical tenants also generate biohazardous waste that must follow proper handling and disposal protocols.
Property Management Capabilities and Service Delivery: Office building property management considerations compound with medical tenancy. In addition to employees and staff, patients come and go throughout the day. This increased foot traffic mandates higher parking ratios and handicapped spaces and advanced accessibility. It puts more wear and tear on common areas and can be viewed as disruptive to traditional tenants.
Most office building owners and property managers don’t know how to structure leases and buildouts for healthcare users, leading to negotiation issues and significant move-in delays. Patients tend to have different needs and more complaints than traditional office workers, which trickle down to property management and ownership who aren’t experienced in day-to-day healthcare operations. Plus, property managers don’t always sit onsite in office buildings, which is often necessary to quickly address and mitigate issues.
Rent and Tenant Allowances: Asking office rents are generally cheaper than medical office buildings because buildout costs are 30%-60% less with lower tenant allowances (TI) baked in. Some office operators will offer medical users lower rent and higher TI to get them in the door, but most either raise base rent or amortize the additional TI. Therefore, the savings for healthcare tenants may not be as significant as they appear on the surface.
Give the Purpose-built vs. Retrofit Analysis the Attention It Deserves
Purpose-built medical facilities designed to meet user needs traditionally make the most sense for healthcare tenants. In some circumstances, retrofitting traditional office for medical use is a smart strategy. In others, the challenges and costs render the option untenable.
Medical practices shouldn’t be allured by the promise of cheap rent or seamless conversion and owners shouldn’t automatically assume any type of healthcare tenant is the answer to filling empty office spaces. Both parties should thoroughly evaluate an office building from the roof to the slab, including leasing and construction options and property management capabilities to fully understand its viability for medical tenancy.
Senior Vice Presidents Kenneth Smondrowski and Joseph McCormick along with Senior Associate Michelle Castro lead Transwestern’s Healthcare Advisory Services in the Mid-Atlantic region. With years of experience advising physicians, hospitals, health systems, biotech firms and other medical professionals, the team provides agency leasing, tenant representation, investment services and strategic account management to owners and users of medical office, biotech and lab space.
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