The COVID-19 pandemic and other current events have significantly increased investors' interest in medical office buildings. The broad office investment and existing retail landscapes have undergone a large-scale disruption due to the ongoing pandemic, bringing healthcare property to the forefront of the investment market. Furthermore, yields for healthcare real estate have compressed in recent years, making these assets appear to be a promising investment.
This guide for medical office building investors will help you determine whether a medical building is a good investment by going over the basics of medical office spaces, medical office real estate trends, the benefits of investing in medical office buildings and what to consider before investing. Keep reading to find out whether investing in healthcare real estate is right for you.
What Is Medical Office Space?
As the name suggests, a medical office space asset is an office building designated for medical purposes. A medical office building (MOB) can range from a small, 1,000-square-foot dental office to a modern hospital complex that spans millions of square footage.
In general, assets are determined to be medical office buildings or typical office buildings according to three factors — location, internal characteristics and tenant mix. Most MOBs are located near medical centers, hospitals or nursing homes. In addition, most are configured into exam room areas with waiting rooms and house a population consisting largely of physicians and related healthcare tenants.
More specifically, there are three core categories of MOBs — Class A, Class B and Stand-alone. The main characteristics of each of these types of MOBs are as follows:
- Class A: This MOB is a recently or newly constructed building of the highest quality. Class A medical office spaces are located immediately adjacent to a hospital or major medical clinic and were usually developed for the hospital or leased from a parent corporation or healthcare REIT.
- Class B: A Class B medical office space is a well-managed, low- to mid-rise building located either on or near a hospital or medical center campus. The owners of Class B MOBs could be a hospital, a physician partnership or an individual healthcare property investor.
- Stand-alone: Stand-alone MOBs are small buildings typically built to accommodate a single practice or a group practice. Most often, the physicians own the building.
Types of Medical Offices
Now that you are familiar with the basics of medical office building real estate, you are ready to consider the details of whether a medical building is a good investment. Below, you will discover the latest medical office real estate trends for each classification of MOB.
Class A MOBs are rapidly gaining popularity among physicians and other healthcare providers. In particular, occupying a shared facility enables doctors to lower overhead costs and devote more funds toward improving other aspects of their practice. Shared facilities also allow physicians to have all of the services a patient may need in one location, including a pharmacy, lab work and radiology. This setup makes appointments more convenient for the patient and doctor.
In addition to lower overhead costs and greater convenience, Class A MOBs generally offer access to more amenities than stand-alone medical office spaces. For instance, a physician may be drawn to a hospital-affiliated Class A MOB for the sake of the technological advances in record-keeping and medicine, along with other resources it offers that make running a practice an easier and smoother process.
These are a few of the most sought-after perks a Class A MOB might provide:
- Electronic record storage: Going paperless is remarkably beneficial for medical offices because file and record storage takes up expensive leased space. Storing records electronically also allows them to be sent to other specialists more easily.
- Digital imaging: Digital imaging via satellite is quickly becoming a valuable technology in the medical world. Class A MOBs use this technology to enable a practitioner to send a digitized result to a specialist for their opinion, saving the time and expense it would take for the patient to travel to the specialist's office.
- Satellite offices: Many physicians try to rotate offices throughout the week to make themselves more accessible to a broader audience of patients. Class A MOBs are especially appealing as rotation locations because they can be found in downtown districts, suburbs and other convenient hubs.
Healthcare property investors need to be aware of these benefits and recognize the rising interest in Class A MOBs. These factors also indicate a potential increase in downtown and neighborhood medical offices, with new construction most likely to occur in city or suburban neighborhoods.
MOBs that meet the Class B and Stand-alone qualifications tend to be similar in the sense that they may be the only space available for medical tenants near smaller medical centers. However, Class B MOBs usually offer practitioners greater benefits, such as better ingress and egress, along with more independence for practices.
Class B MOBs also boast extensive outpatient services, resulting in many Fortune 500 companies that provide medical services fighting over Class B MOB assets. In fact, a standard Class B MOB rent roll may include well-known healthcare organizations like Roche, Baxter and SmithKline Beecham. These big-name tenants often attract medical office building investors.
Due to the extensive benefits of Class A and B office spaces, the demand to decrease overhead and the Tax Reform Act of 1986, which eliminated much of the tax incentive for individual ownership, stand-alone MOBs have been progressively falling out of favor with physicians and investors alike.
However, stand-alone MOBs still have their place. Certain specialists and general practitioners often do not require the elaborate services that Class A and B MOBs boast and dialysis or urgent care centers are still popular stand-alone properties for investors. In addition, physicians usually qualify for commercial loans and can typically afford down payments. Financially savvy physicians and healthcare property investors might be intrigued by assets like a multi-tenant building that can offset rental costs and generate positive cash flow.
The Top 3 Benefits of Medical Office Real Estate Investment
The sections below will consider the five most persuasive reasons for investing in medical office real estate.
1. The Healthcare Industry Is Resilient
The necessity of healthcare makes it more resilient than many other industries. While consumers may cut down on entertainment and dining during a recession, a healthcare issue will need to be treated regardless of the circumstances. The vitality of healthcare makes investing in MOB assets less risky than other types of investments.
Although technological advancements have given rise to telecommuting and telehealth options, video conferencing is a poor substitute for meeting your physician for an in-person appointment. In addition, a patient typically needs to be physically present for treatments and procedures. The demand for in-person appointments indicates MOBs have solidified their purpose and value as an asset.
The diverse nature of MOB investments is a huge advantage for investors. A medical office space could house tenants of all sorts, including primary doctors, dentists, dermatologists, plastic surgeons, urgent care centers, dialysis centers, laboratory services and digital imaging services. Tenants from the healthcare industry often have a healthy income stream and strong patient followings that may attract complementary tenants. These characteristics can enhance the appeal of the investment for everyone involved.
3. Dependable Demand
The aging baby boomer population assures that the demand for healthcare services outside of a traditional hospital setting will likely continue to rise. Baby boomers make up a large portion of the population, meaning healthcare providers can rely on a steady stream of clients for years to come. In fact, the healthcare industry will likely need to expand to accommodate aging baby boomers and continue offering preventive healthcare services.
Invest in MOBs to add stability to your portfolio. While dining, entertainment and other small businesses can often lose money and fail to pay rent on their buildings, medical tenants tend to earn a higher income. This means that their business is less likely to fail, and they are more likely to be reliable tenants.
What to Consider Before Investing in Medical Office Real Estate
Now that you know what you stand to gain from investing in medical office real estate, you need to know what to consider before choosing your healthcare property investment. Below, you will learn the key characteristics to contemplate when investing in a healthcare real estate asset.
Office Management Structure
Technology is rapidly evolving and ever-changing, making it imperative for an MOB to have an adaptable office management structure. If a modern healthcare practice wants to be successful, it needs to be located in a building that allows technological transitions to occur smoothly. Specifically, the offices need to be managed in a way that is cutting-edge, organized and orderly without being rigid.
For instance, an MOB can optimize its office management structure in the following ways:
- Universal procedure and exam room sizes that can serve different purposes
- Incorporating new technologies such as video calls that enable healthcare providers to accommodate patients virtually
- A modular design rooted in traditional planning that can use prefabricated construction methods
- Replicable planning strategies that can be used at varying scales
Location is always a vital element in real estate. In fact, location might be the most important factor when evaluating your medical office building investment options. An MOB that is on or near main roads will naturally receive more traffic and enhanced visibility that results in more business. Similarly, you will want the property to be in a high-population area that grants potential patients easy access to the facility. Convenience is a huge draw for patients, making a central location crucial for medical offices.
You will also need to think about the geographic location of your MOB asset carefully before purchasing the building. States with mild climates year-round, such as California, Arizona and Florida, tend to attract more baby boomers and families with active lifestyles. Both of these populations have a higher need for medical care, making an MOB asset in these locations a wise investment.
Finding a prime location is critical because a noteworthy location is more likely to attract high-quality healthcare providers than a property that is not ideally located. Since healthcare providers are also looking to make money, they will search for offices in places with maximum exposure. Naturally, if a healthcare center has high-quality healthcare providers, it is more likely to be a profitable investment.
If you are interested in purchasing an existing medical office space, you will need to pay special attention to the facility's size. Here are a few essential questions to ask about the building's size:
- How many healthcare providers can the building hold?
- How many patients can the facility's waiting area sit comfortably?
- Does the property have lab facilities on-site or the capacity to add lab facilities?
- Does the building provide enough space for imaging technologies?
- How many parking spots are included on the premises?
Along with considering the building's current size, you will want to think about whether the facility has the capacity for expansion. Is there enough land to accommodate a larger building if you decide to expand it in the future? A smaller property with plans for expansion can often be more appealing to healthcare providers than a larger facility with no more room to grow.
Investing in MOBs usually requires professional knowledge of tenant necessities, which can range vastly from one practice to the next. Some tenants might need specialized equipment, such as medical imaging machines or oxygen concentrators to run their practice efficiently.
Factors such as electrical demands and setup requirements are also essential considerations. Medical facilities often need to power many machines and have access to sinks and other water sources throughout the building. Purchasing an MOB requires a vast knowledge of the needs of tenants in order to remain operational.
Investors can rest assured knowing investment in MOB properties is still possible without an expansive and specialized knowledge of medical office operations. 1031 Crowdfunding offers turn-key solutions to invest in MOBs through Delaware Statutory Trusts (DSTs). DSTs allow accredited investors to acquire an asset while leaving property and asset management to the experts. DSTs are attractive to many investors due to the prospect of passive management and income. Investing in DSTs also makes MOBs eligible for a 1031 exchange.
Learn More About Medical Office Investment Opportunities From 1031 Crowdfunding
Investing in a medical office building can add significant stability and earning potential to your portfolio. If you are interested in the dependability of investing in a medical office building, explore the medical office investment opportunities available from 1031 Crowdfunding. When you join the Crowd, you will gain access to a marketplace of investment properties curated by real estate professionals. The experts at 1031 Crowdfunding can help you secure the healthcare property investment that is right for you.
Take the first step toward adding a lucrative medical office asset to your portfolio by registering with 1031 Crowdfunding today.