Look at the bigger picture when you work with medical office buildings

Brian J. Dougherty, associate, PemReal Corp.; and Richard Muhlebach, principal, Richard Muhlebach LLC

As published in Scotsman Guide's Commercial Edition, September 2012.

In the past few years, the medical-office market has gone through substantial changes as it struggled to catch up with changes in the health care delivery industry. From new regulations to hospital mergers and changing requirements for insurance companies, the market has seen several acquisitions of medical groups by larger hospitals, and the impact has gone well beyond the medical field to the commercial real estate market.

To start, it is important to understand how the growing power of hospitals has placed pressure on the operations and profitability of smaller medical practices. The new market structure has led many medical practices to take a closer look at their performance, operations and operating expenses in an attempt to ensure their own survival and to be profitable.

As a result, medical groups and single-physician practices have been reviewing and analyzing expenses related to staffing, insurance, risk management, electronic records, paper records and documents as well as building and occupancy costs. Because real estate and occupancy costs typically are the third-largest expense for a medical practice, efficient space-planning has become a necessity to pursue for any significant reduction in occupancy costs.

Today’s office planning focuses on maximizing space for revenue-generated areas like exam and procedures rooms, eliminating physicians’ private offices and reducing the size of waiting rooms. Because medical suites’ current designs are aimed at a more comfortable feel and less clinical appearance, many medical groups have even chosen to relocate to buildings and office space that represent their desired brand and image. These medical practices are cost conscious, however. They are likely to make decisions based on the costs of their leases and carefully negotiate lease terms and operating provisions.

One question that commercial mortgage brokers must consider is: How do trends in health care delivery impact the leasing of existing properties as well as the marketing and leasing of new ones? This is an area that the underwriter will look at and may be a factor in whether a loan is closed or not. The answer requires a careful consideration of the following five issues.

1. Location

For years, medical office buildings located near a hospital were considered a golden investment because of the time saved and the convenience of a short walk or drive for patients and physicians alike. In a physician’s view, the convenience of location allows time to see additional patients and generate additional revenue. The changes in space requirements by medical professionals, however, make it inevitable for commercial mortgage brokers to question whether existing older medical office buildings near hospitals meet these criteria or not. If the answer is no, it is critical to consider if the building can be repositioned. In other words, can it be leased to different medical or nonmedical users?

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