Advantages of buying medical office space

Author Ivan Smiljanic Read bio
Tags: medical office space
Date: September 1, 2020

Delivering care is the primary business of a healthcare provider, whether we’re talking about hospitals, physician’s offices, or a larger health system. But a secondary business to them is real estate and the current situation in the healthcare real estate market is starting to change. 

Owning a medical office space gives you more control over occupancy cost and many other benefits, but it’s important to understand the local market as well as the career timeline of practice partners before deciding on buying one. Leasing, on the other hand, can be a much cheaper option, and safer too.

It’s impossible to give a precise forecast of future real estate returns, with so many factors having influence over it. Local market conditions, individual risk tolerance, the stability of practice, and the expected stay in a certain location are all factors that need to be considered. 

To help you make the best and the most efficient decision, we’ll weigh in the pros and cons of owning medical office space.

When you should buy medical office space

The most obvious difference between owning and leasing is that buying is more permanent. The strategy that will work best depends on the needs of the organization.  

Clients who are looking at 10 to 15 years of practice are more likely to buy because that period allows them to pay up the mortgage and increase equity over time. The price of purchase varies and is mostly affected by location, but loan terms to physicians are often more favorable than for any other type of occupants because they have a credit history and the usual long time of stay. 

Private equity groups and hospitals on the other hand have been aggressive buyers of medical office space in recent years, with the vacancy rates being pushed down and sales prices boosted as the result.

Return of investments

From a doctor’s point of view, this is gonna be the least important objective of owning medical office space. Even though some doctors have collected a large retirement fund from medical office space ownership, they are an exception. More doctors than them have been disappointed at the retirement age to find out that there is very little equity in the MOS, but no market for them. This can happen due to several factors, some of which are overpaying upfront for the property, general market conditions, or failure to maintain the property adequately. 

Mingle with other doctors who own or have owned medical office space in the past. Their experience and expertise may come in quite handy. Also, gather information from CRE brokers of the market rate for leased office space and the cost per square foot of buying or building in the area you got your eye on.

The opportunities

Owning a medical office space can be a great recruiting tool and can attract physicians. A good option for the physician group is to retain the real estate and lease it to the health system for some additional income, and by doing so provide better economics, largely in the form of tax benefits.

The most suitable real estate philosophy depends on the size and type of organization. For large health systems, it might be a good option to approach an investor and try to convince them to sell an ancillary building and after that lease it back to ensure the cash flow.

Some form of a coherent strategy is inescapable and utterly necessary, especially because demographics changes in the US are resulting in need for stable real estate practices.

Another contributing factor for healthcare real estate is the cost of healthcare. In combination with the industry’s ongoing decentralization, the providers are looking for flexibility to expand their footprint and move to the best locations they can.

Ownership of medical office space is certainly not for everyone. The saying: “It’s better to own than rent” is not exactly conventional wisdom as it regards medical office space. Setting up the objectives, gathering all information, and running the numbers is will help you in the making of the right decision.