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Investing in Medical Office Assets
The medical office sector is a critical but often overlooked asset type within office commercial real estate. Medical office buildings, also frequently referred to as MOBs, generally offer investors stable, sizeable returns owing to a strong, largely recession-proof tenant base, low vacancies, and increasing demand for outpatient services as retired populations grow. They can, however, offer a few more complications into an investment decision compared to your standard office property acquisition.
Several different types of buildings can be considered MOBs. While most people think of a property with a few doctor’s offices as a medical office building — and, yes, it is — a number of other assets can fall within this category. They can include:
Ambulatory surgery centers
Screening or testing centers
General or specialist physician office buildings
3 Key Considerations for Acquiring a Medical Office Property
If you’re looking to add medical office buildings to your commercial real estate investment portfolio, there are three key questions you should ask yourself, well before visiting the property or even looking at your financing options.
Where Is It Located?
As with every commercial real estate sector, location is critical. But a medical office building’s location dynamics are quite different compared to those of traditional office properties. MOBs on or near to a major hospital campus unsurprisingly tend to perform better, but also medical office properties near large retirement communities — or even those in markets characterized by a higher-than-average median age — offer significant investment upsides, even if that may be reflected in the asking price.
Does It Have the Right Features?
Another generic category, but several property characteristics can make the difference between a successful MOB investment strategy and a failure. Ensure the building meets all accessibility standards under the Americans with Disabilities Act. And don’t be afraid to do a deep dive into the building’s systems where they differ from a standard office asset’s. Plumbing, electrical, and ventilation requirements may vary significantly, and having to foot the bill to upgrade a behind-the-times property may be more trouble than it’s worth. Also be sure to check out the building’s parking ratio.
One thing to consider, however, is not what your tenants need today but what they may need tomorrow. You may not have a crystal ball, it’s important to ensure your asset is marketable and adaptable to the requirements of future tenants, should your existing tenant roster downside, relocate, or even close up shop for good. Having an adaptable setup is essential.
Do the Size and Tenant Mix Meet Patient Needs?
This one can be really important. A general practitioner may only require, say, 1,500 to 2,000 square feet, and a specialist may require around the same, depending on the specialization. But it’s not as simple as meeting one or two tenant’s needs individually — if few medical office assets are in the area, or if your property doesn’t have the greatest location, consider if there’s enough space for different, complementary tenants to create a beneficial ecosystem for their patients just through proximity to each other.
Think about it this way: If you acquire a small building a little out of the way with a nephrologist office and a dental practice, the two tenants probably have little to offer each other, except by pure, unfortunate, oddly specific circumstance. On the other hand, if you have a similarly sized building, leased to a general practitioner and a radiologist, patients visiting their doctor for a referral for an X-ray may be able to simply stop by next door for the next step in getting care. If patients constantly need to drive from one building to another several miles away, that may impact how many patients choose your tenant for their care — and that can eventually lead to vacancy.