Advising medical tenants in a changing market

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Moving any tenant has its pros and cons, however, moving a medical tenant can generate a totally separate set of issues.Moving any tenant has its pros and cons, however, moving a medical tenant can generate a totally separate set of issues.
Terrence Pace
Broker, health care solutions specialist, JLL, Denver

Brokers log countless hours working with clients who are in the marketplace looking to relocate. No matter if the move is due to growth or downsizing, brokers try to educate clients on what the current market is bearing from the beginning. Moving any tenant has its pros and cons, however, moving a medical tenant can generate a totally separate set of issues.

Medical tenants are typically in a location much longer than other office tenants, therefore moving is often very difficult. The first thing a medical tenant must consider is its patient base. Such tenants will question the number of patients who will follow them if they relocate. They question which patients are elderly and need assistance, who relies on public transportation and who travels a far distance to come to their office. They will want to know if moving will add additional travel time to their patients’ commute. Medical professionals also are concerned about losing a percentage of their patient flow. It is estimated a medical office could lose up to 5 percent of its patients simply due to a move. In order to get a move right, some medical professionals will ask their broker to provide mapping and demographic information. It is extremely important for a medical professional to look for a new office with good referral sources. Referral sources add to the attractiveness of the new building and the tenant feels the building is vibrant which allows them to continue to grow and prosper.

Outside of growth and patient flow, medical professionals also are concerned with the operational side of the new office. A medium-size, primary care office can utilize up to 12 exam rooms, each of which requires plumbing. Adding plumbing throughout a medical office can be very expensive. The cost to add plumbing to a new space starts around $75 per square foot. Other medical tenants have different space requirements to operate their practice properly. For example, nephrology groups and surgery centers have a need for an independent power source, such as a generator. This is one reason landlords and tenants look to each other to contribute significant funds to improve the space.

Medical professionals also are concerned about losing a percentage of their patient flow. It is estimated a medical office could lose up to 5 percent of its patients simply due to a move.”

Some medical tenants have been in their current space 10 to 15 years. The last time they changed offices the market was different. Just five years ago we were in a market in which landlord concessions were readily available. Some medical tenants hit the marketplace looking for six months abated rent and a full turnkey tenant improvement finish. Even with the special requirements, some tenants do not feel they are getting a fair deal if the landlord does not make them feel wanted by providing landlord concessions.

The special needs of medical office users requires you have specific designations for medical office buildings. These special requirements go into consideration at the development stage of the building. There is a need for additional electrical power for a MOB compared to a standard office building. The typical MOB will need larger water taps to accommodate all the plumbing and water use that is required. Medical buildings require more parking stalls for medical tenants and their patients. The parking ratio in the Denver metropolitan statistical area ranges from four to five parking stalls per 1,000 sf for a MOB. Conversely, a regular office building typically is required to have two to three stalls per 1,000 sf for parking. Because of the special requirements of medical tenants, there is additional stress added to the building as well as the landlord.

When brokers are advising medical tenants in the market, they inform them of the changes in the market up front. There are advantages to being in a MOB and certainly to having medical tenants in your building. Medical tenants are more stable than most other tenants, and they typically stay in one location longer and do not like to move around. The same type of patients come to the building consistently for years. This helps to control foot traffic in and out of the building. Banks and investors look at medical buildings as better, safer investments compared to a typical office or mixed-use property. Although there are changes in the market, we believe the benefits outweighs the risk for the landlord and a tenant.

Featured in the April 2017 Health Care Properties Quarterly issue

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