4 Things to Know When Investing in a Medical Office Building

How to Invest in Medical Office Buildings

Currently, seasoned commercial brokers are encouraging real estate investors to buy into healthcare centers. As prices fall, now it is a great time to invest in these timeless and necessary facilities.

There are several ways to invest in medical office buildings.

Healthcare Real Estate Investment Trusts (REITs) are one way for average investors to enter the medical real estate arena. With a REIT, the investor purchases a “share” of the medical office building, receiving dividends from the property’s lease. There are many medical REITs available on the market today.

Some investors also turn to crowdfunding or joint ventures to purchase, build, or renovate medical office buildings. This process allows multiple investors to pool their resources and purchase a medical office building. Often, these investors are more involved with the day-to-day operations of the process than REIT investors.

Finally, high net worth investors or investment broker teams may choose to purchase, build, or renovate medical office buildings without outside assistance. This represents the greatest risk, but also the best potential for reward. Because these investors are solely responsible for the financial risk, they also receive all the profits.

4 Things to Know About Medical Office Buildings

If you decide to invest directly in a medical office building, here are 4 things to keep in mind.

1. Three Axioms of Medical Office Real Estate: Location, Location, Location

Location is the most important factor for medical office building investment. Businesses on or near main roads with higher traffic counts and better visibility typically outperform businesses in other locations. Additionally, the property should be in a high-population area, where potential patients have easy access to the building. Without a large enough population and an adequate density of people, a medical business may not succeed.

Also, a medical building should offer ease of access and convenience for patients. If another medical facility offers the same level of care but is more conveniently located, patients are likely to choose the closest and easiest option. 

In addition, choose the geographic location carefully when buying a medical office building. “Sunbelt” states, like Florida, California, and Arizona, which all have mild year-round climates, attract retiring Boomers as well as families seeking an active lifestyle. Investing in a medical office building in one of these locations is a smart choice as these areas have a higher need for medical care

Finally, prime locations are also more likely to attract higher quality healthcare providers. Medical professionals also want to make money, so healthcare providers look for offices in locations with the most exposure. Of course, if a healthcare center has top-quality healthcare providers, it’s more likely to be a lucrative investment.

To learn as much as you can about the location, a market analysis will provide you with the data you need. Contact our investment pros today to learn more about your options.

2. Questions About the Size of the Building

When seeking to purchase an existing medical office building, the facility’s size is another key factor. Some key questions to ask regarding size are:

  • How many healthcare providers can the building hold?
  • Is there adequate space for imaging technologies?
  • Are there lab facilities on-site, or the capacity to add them?
  • How many patients does the waiting area hold comfortably?
  • How many parking spaces are on-site?

Another issue related to size is the capacity to expand the facility. An existing medical office building that isn’t quite big enough could be expanded, providing there is enough space to do so. Plans for future expansion of services may create the need for additions to the existing structure or even the construction of an additional structure. Buying a property that has room for expansion provides options for future growth.

Building size is also an important consideration given the current pandemic. A medical office building should have adequate space to allow social distancing for patients and staff.

3. Is It an Updated Or Outdated Medical Building Design?

A couple of decades ago, it might have been worthwhile to buy an outdated and affordable property and convert it into a medical office building. However, changes in medical technology require medical office buildings to be technologically advanced. Today, smart buildings are taking over the commercial real estate industry, and the healthcare sector is no exception.

Modern medical office buildings are more specialized and more digital than ever before. Along with advances in and increased reliance upon technology, medical facilities need ways to save on costs like power and other utilities. This need has produced ‘greener’ medical facilities with features like super-efficient HVAC systems and LEED certification.

Smart buildings are also helping these businesses save on costs. Automated systems, for instance, can reduce heating and cooling costs exponentially. These systems can also reduce costly repairs. Overall, these technologies can mean bigger profits for both the medical tenants and the medical office building investors.

An outdated structure that is not fitted for the latest medical, communications, and other technologies could require a significant investment to bring it up to 21st century standards. Although new isn’t always better, when it comes to medical facilities, the physical environment should be concurrent with contemporary medical technology.

4. The Strength and Adaptability of Medical Office Structures

Since technology changes so quickly, a successful medical office building needs to be adaptable. Modern healthcare is constantly evolving, so practitioners are best suited to buildings that allow those changes to occur seamlessly. With the Coronavirus pandemic continuing to wreak havoc, healthcare centers worldwide are scrambling to use any and all available technology to increase patient and healthcare provider safety. Therefore, medical office buildings should have the infrastructure in place to meet these evolving needs.

Here are a few types of flexibility important for medical office buildings

  • Universal exam and procedure room sizes which can accommodate different purposes.
  • Modular design based on traditional planning, but which may use prefabricated construction methods.
  • Replicable planning methods which can be used at different scales.
  • Incorporating new technologies that allow healthcare providers to serve patients virtually.

Overall, mixing traditional planning and modular construction with prefabricated spaces can reduce both the time to completion and the total cost. Also, using standard room sizes allows flexibility in multiple spaces to adapt to changing needs and evolving technologies. Be sure to keep adaptability in mind when purchasing a medical office building.

Making Smart Decisions When Buying a Medical Office Building

Healthcare providers

Most restaurants don’t last more than a single year in business. And e-commerce sales affect retail stores, causing many to shut their doors. During the pandemic, even more retail businesses have gone out of business. Even some multifamily property markets are seeing increased vacancies. Yet Americans will always need healthcare – and more so as the population continues to age. Because of this, many commercial investors view purchasing medical office buildings as safe and lucrative investments.

When choosing to purchase a medical office building, you must consider several factors. Most importantly, consider the property’s location (including the population density and proximity to residential areas). Secondly, examine the property’s size, but not just the building itself. Look at the land it sits on too.

Furthermore, healthcare providers generally sign longer-term leases than other commercial tenants. Why? For medical practices, relocation is much more complicated than it is for other businesses. Therefore, medical tenants are more likely to stay in one property for years on end. Medical office buildings usually have lower vacancy rates than other types of commercial properties. Therefore, medical properties generally produce a steady cash flow for investors.

Another factor you must consider when buying a medical office building is its proximity to hospitals. In general, proximity to a hospital can produce advantages for a medical practice.  These locations make it easy for hospitals to refer patients to private practitioners. Both healthcare providers and patients also like the ease of a central location for all their medical needs. Therefore, as an investor, consider the property’s proximity to other medical services and providers.  

Houston Market Outlook for Medical Office Buildings

Houston has a robust medical office market. It is home to the largest medical “city” in the world – the Texas Medical Center. This campus sits on over 2 square miles of real estate, with more than 10 million patients visiting each year. This complex of hospitals, medical offices, and research facilities produces about $25 billion in economic activity annually.

What’s more, Houston has a growing population that continues to age along with the rest of the United States. Therefore, the demand for high-quality medical care in the Houston metro area is sure to remain strong. As a result, the outlook for Houston’s medical office market is very favorable.

At the end of Q3 2020, Houston’s average office vacancy stood above 21%. That rate has been above 20% for four years in a row. In contrast,  Q2 2020 medical office vacancies held steady at 16% in the Houston area. 

Like much of the country, healthcare jobs have taken a hit due to the Coronavirus pandemic. Compared to July 2019, the healthcare sector faced a 5% reduction in healthcare jobs. However, compared to other sectors, the healthcare industry seems to be making a remarkable recovery. In fact, despite the pandemic, a new report suggests that by 2036, more than 1 in 4 healthcare jobs added to the Houston economy will be healthcare-related. Even with the economic downturn, Houston-area medical office building projects continue to move ahead, like the Houston Methodist Clear Lake Hospital expansion. While some projects are on hold, the healthcare sector will likely remain a critical piece in the Houston economic recovery puzzle.

The Need For Medical Office Space

Undoubtedly, Americans are getting older.

Currently, there are more Americans over the age of 65 than at any other time in history. Census data reports that there are 49 million retirement-age adults in America today. Surprisingly, the number of Americans over 65 will double by the year 2055. Every day, some 10,000 Baby Boomers reach the age of 65.

It shouldn’t be surprising that these Americans need more medical care as they age. Consequently, the nation’s aging population plays a major significant role in the growing medical office building sector.

Besides an increasing number of older adults, more seniors have access to medical insurance than ever before.

Today, an estimated 24 million Americans who were previously uninsured are now covered by the Affordable Care Act. During the pandemic, more than half a million Americans enrolled in the program for the first time due to job loss or other loss of private insurance. As a result, having more insured Americans has created a higher demand for healthcare.

In response to this growing need, investors have flocked to medical office buildings like micro-hospitals or urgent care clinics. Unlike many other commercial real estate sectors, medical office buildings are largely immune to the economic factors which affect retail businesses and restaurants. 

Medical Office Investments During the Pandemic

Even amid a pandemic, when Urgent Care Clinics and micro-hospitals have seen historic drops in patient interactions, the outlook still remains positive optimistic for future growth. Many healthcare centers and healthcare providers have risen to the challenge of telehealth, using technology to continue treating patients without risking virus exposure. As time goes on, many clinics will continue to use these services in the future. As such, we are entering a new and exciting age for healthcare, allowing seniors to have “doctor’s visits” without ever leaving home.

Overall, commercial real estate experts consider medical office buildings ‘no-lose’ investments. Despite this year’s rise in vacancy rates for medical office buildings in Houston and beyond, investment experts still consider medical real estate a wise choice.

Learn More About Buying a Medical Office Building

For more information on investing in medical office buildings, contact us today and we can advise you on how to invest in medical office buildings and other profitable assets.

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