Medical Office Buildings - Are They Immune to Economic Cycles?
Often times the answer is yes. Medical office properties are increasingly popular with real estate investors and commercial mortgage lenders. When financing specialty properties mortgage lenders share the same concerns as owners when it comes to investment return and safety.
The Prognosis as an investment vehicle is very good. The demand for this type of property is growing due to:
- Demographics - The population is aging faster than ever.
- Outpatient services that are expanding.
- A stable tenant base - Doctors tend to stay put longer with an average occupancy term of 11 to 14 years. Lease renewals are 90% or higher.
- The availability of very good loan programs coupled with a very low default rate.
As with all real estate investments medical offices are not without some risks:
- This is not an inexpensive operation. Development costs are just higher due to increased construction costs.
- Doctors can be price sensitive tenants.
- Capitalization rates (a ratio of income to value) have reduced in recent years putting medical properties in-line with general office buildings.
- A few of the previously booming suburban areas are in the recovery room.
The Prescription is to proceed cautiously with a positive outlook. Despite the recent run up in prices this remains an excellent investment vehicle if you pay attention to the economic details. Consult with experienced people in this area and be aware of property specifics as they relate to tenant needs – location, building layout, plumbing and electrics. And of course paying too much for the property can be hazardous to your financial health.
Investors and lenders looking into this type of transaction will find that they have not yet missed out. In many locations medical rents are still increasing, vacancies are dropping, and prime locations are increasing in value.
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Contact: T. Budd Fletcher
831-239-8504
bridgecapital@gmail.com