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Medical Office Buildings Poised For Quick Recovery

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While hospitals and health-care facilities have been inundated by an influx of COVID-19 patients, many medical offices that offer non-emergency services have seen the opposite occur.

The property type’s solid fundamentals prior to the virus, however, promise a relatively rapid rebound when the economy is up and running again, according to Marcus & Millichap’s April special report on medical office buildings.

With many shelter-in-place orders in effect, communities across the U.S. are avoiding unnecessary travel and exposure, including those patients seeking elective surgeries or nonessential surgical and dental procedures. As patients decide to reschedule their appointments until further notice, many medical offices aren’t generating revenue and have had to partially, or fully, close.

The Post COVID-19 MOB Market

The COVID-19 pandemic has already left its mark on different facets of commercial real estate like office leasing, construction and retail. While the medical office building market was not spared, its strong market fundamentals prior to the emergence of the new coronavirus offer signs of a healthy market after the pandemic ends.

The national vacancy rate for medical office buildings was 90 basis points below the trailing 10-year-average of 9.7 percent, according to the report. The U.S. market also saw 6 million square feet of medical office space absorbed in 2019. Following demand, the below-average availability of medical offices has led to a steady stream of new properties, with deliveries hitting 10 million square feet. The statistics have attracted the attention of private investors looking for assets between $1 million and $10 million.

Once the COVID-19 pandemic is under control and the economy recovers, the medical office building market is expected to bounce back. The combination of an aging population, expanded medical insurance coverage and new treatment options equate to a growing demand for health care and the medical offices that come with it. Once the economy begins to return to normal, the backlog of work due to closed offices and rescheduled or canceled appointments will likely bring a sudden influx of work for medical-office staff.

And once the market returns to normalcy, the report noted that well-located assets with the infrastructure to handle modern medical needs will be in high demand. Specifically, medical office building demand may grow in non-urban markets as younger Millennials begin to move away from urban centers.

 

Source: Commercial Property Executive

Tips For Physician Real Estate Owners During The COVID-19 Pandemic

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In the midst of the worldwide epidemic caused by COVID-19, many medical real estate owners have been struck with requests from tenants they no longer control to defer rent for April.

This can be alarming for physician real estate owners as it’s uncertain when elective procedures and non-essential medical services will resume. Will a tenant ask to defer rent in May also? June? These landlords aren’t always seasoned investors; they’re physicians who are feeling pressure from large, sophisticated business entities – all the while, they have mortgages and overhead to cover.

As a real estate owner who no longer has control of your tenant, it’s important to understand that you have only a few opportunities to exit your real estate investment.  In order to sell at a premium, you need desirable lease terms. These include market rents, a long term (10+ years) NNN (“triple-net”) lease, attractive rental escalations, and other more nuanced details that can make or break your lease.  Many physician landlords have a non-salable property because of the length of their lease term; few investors would pay a premium for real estate that has the potential for inconsistent cashflow, even in our thriving metroplex.

Just as you’re not inclined to defer your tenant’s rent, your tenant is typically not inclined to make changes to their lease. While there are few occasions in a landlord-tenant relationship where the lease can be re-negotiated, COVID-19 seems to have opened a window of opportunity. Whether your long-term objective is to hold or sell  your real estate, there are solutions that benefit both parties.

As an example, many leases feature renewal options that provide the tenant short, 5-year increments by which they can extend their lease. As mentioned earlier, if a lease has fewer than 10 years of remaining term, it will be challenging to achieve a premium value in a sale.  If your tenant requested you defer their rent, you could counter that they exercise one of these renewal options in exchange.

For a health system or management services organization who has invested in the business and facility for the long-term, this should not be an issue. At the same time, this adds significant value to you as the landlord because your facility now has a longer lease term. Not only does your real estate now have more security and liquidity, but it can also be sold at a premium value.  Most importantly, you created a solution that is mutually beneficial to you and your tenant during these challenging times.

The uncertainty from COVID-19 can be daunting for physician real estate owners who depend on rental payments from their management partner. Fortunately, there are creative solutions that facilitate collaboration and continuity of operations until our community regains a sense of normalcy.

 

Source: D Magazine