2. Tenant mix

Commercial mortgage brokers should advise clients to review and analyze the building’s tenant mix. A few areas that can give the owner a clue or two on the tenants’ requirements are:

• Which practices have converted, or are converting, to electronic medical records;
• The number of physicians in each practice; and
• The cost for a practice to relocate.

Medical suites generally require expensive tenant improvements, and the cost to replace existing tenant improvements can provide insight into whether medical groups need to renew their leases or not. Remember, replacing medical tenants also is expensive, and in today’s uncertain health care environment, the re-leasing of space may take a long time.

3. Review leases

Work with your client on reviewing the terms of existing leases. It is critical to remain abreast of current market conditions. Keep in mind that the reason many medical practices are requesting cancellation provisions is to give themselves some room to relocate, if needed. They also try to have better control on their occupancy costs with caps on pass-through charges.

4. Hospital plans

Go the extra mile for your client and try to find the strategic growth plan for local hospitals or any hospitals with indications of intentions to acquire medical groups, open community clinics, etc. This type of activity can provide direct, and often fierce, competition with practices in your clients’ property. In addition, consider if any of the existing tenants are candidates to be acquired by a hospital and therefore vacate the building.

5. Rents

Your clients’ understanding of how medical practices are scrutinizing their occupancy costs is critical. There must be some insight into the tenants’ ability, or lack thereof, to pay higher rents and operating expenses in newer medical office buildings. Remember, there is a significant difference between the rents for quality existing medical office buildings and the rents needed to support a new medical office building.

Despite the changes in the market, medical office buildings that are strategically located and can accommodate the changing requirements of the medical industry will be positioned to outperform the competition and produce excellent returns for investors. The role of commercial mortgage brokers is to highlight how this can be accomplished when they submit a deal for underwriting.  

Brian J. Dougherty has 25 years’ experience in leasing, management and development of medical office buildings, as well as consulting to medical practices, building owners and hospitals. Reach Dougherty at (425) 503-1901 or bdoug1@msn.com. Richard Muhlebach is a commercial broker in the Seattle area with 40 years’ experience leasing and managing medical office buildings. Muhlebach has co-authored 19 books and written more than 120 articles on commercial real estate. Reach him at rmuhlebach@comcast.net or (206) 660-6902.

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