Medical Office Building Investments

Class A MOBs are rapidly gaining popularity among physicians and other healthcare providers. Similar to other Class A real estate properties, such as industrial spaces, Class A MOBs tend to be newly or recently constructed and made with the highest quality building materials. They are often located right next to major medical clinics or hospitals, sometimes developed for the hospital itself or leased from healthcare real estate investment trusts (REITs) or parent corporations.

Occupying a shared facility in a Class A MOB enables doctors to lower overhead costs and devote more funds toward improving other aspects of their practice. Shared facilities also allow physicians to provide multiple services to patients in one location, such as radiology, lab work, and pharmacy access, making appointments more convenient for both patients and doctors.

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, hospital-affiliated Class A MOBs may provide technological advances in record-keeping and medicine, along with other resources that make running a practice easier and smoother. Some sought-after perks of Class A MOBs include:

• Electronic record storage: Going paperless is remarkably beneficial for medical offices. It saves expensive leased space and enables easier record sharing with specialists.
• Digital imaging: Digital imaging via communication satellite allows practitioners to send digitized results to specialists for opinions, saving time and expense for patients.
• Satellite offices: Class A MOBs, found in downtown districts, suburbs, and other convenient hubs, are appealing rotation locations for physicians aiming to make themselves more accessible to a broader audience of patients.

Healthcare property investors should be aware of these benefits and recognize the rising interest in Class A MOBs, indicating potential increases in downtown and neighborhood medical offices, with new construction likely to occur in city or suburban neighborhoods.

Class B medical office buildings (MOBs) are well-managed buildings, ranging from low- to mid-rise structures. These spaces are often located relatively close to medical centers or hospitals, sometimes on the same campus. Class B MOBs are owned by individual investors, physician groups, or hospitals themselves.

Ideal for medical tenants seeking smaller medical centers that align more with stand-alone buildings, Class B MOBs usually offer practitioners greater benefits, including better ingress and egress and more independence for practices. They generally provide extensive outpatient services, making them valuable assets for many companies.

MOBs meeting Class B qualifications are often the only available space for medical tenants near smaller medical centers. These buildings attract many Fortune 500 companies that provide medical services, resulting in a competitive environment for Class B MOB assets. Standard Class B MOB rent rolls may include well-known healthcare organizations like Roche, Baxter, and SmithKline Beecham. These types of tenants often attract medical office building investors.

Stand-alone MOBs, typically the smallest buildings of the three categories, often accommodate a single practice or smaller group practice. While Class A and B office spaces have garnered extensive demand due to their benefits and reduced overhead, stand-alone MOBs still hold appeal for certain specialists and general practitioners.

These buildings are usually owned by physicians themselves, offering them greater independence in managing their practices. Despite the Tax Reform Act of 1986, which reduced tax incentives for individual ownership, stand-alone MOBs may still remain a viable option for investors. Dialysis and urgent care centers, in particular, continue to attract interest as stand-alone properties.

Financially savvy physicians and healthcare property investors may find multi-tenant stand-alone buildings appealing, as they can help offset rental costs and generate positive cash flow. While stand-alone MOBs may be less common in today’s market, they still offer unique opportunities for those seeking more autonomy in their medical practice settings.

Compared to certain asset classes, such as retail, healthcare real estate has demonstrated strong performance with consistent long-term occupancy rates.

By 2020 and 2021, a combined 90% of firms stated their occupancy rates were either stable or increased from the previous year. Even with the impact of the pandemic, 80% of respondents believe the healthcare real estate industry is recession-resistant. 

The robust occupancy rates of MOBs reflect the prevalence of long-term leases, often attributed to the specialized features of medical buildings. As the demand for healthcare services and professionals continues to grow, driven by demographic trends and advancements in medical technology, investments in healthcare real estate are poised to remain resilient in the face of economic fluctuations.

Medical office buildings (MOBs) stand out as resilient assets, largely due to the enduring demand for quality healthcare services outside of traditional hospital settings. Several factors contribute to this sustained demand, including a growing emphasis on preventive care and wellness and an aging population. MOBs with diverse tenant mixes offering a range of services tend to weather economic fluctuations more effectively.

Despite the rise of telemedicine and virtual visits, in-person appointments remain essential for numerous medical procedures, lab work, and surgeries. The inherent necessity of healthcare services positions MOBs as valuable assets, especially during economic downturns when other industries, such as entertainment and retail, may falter. 

Compared to the broader office sector, MOBs demonstrate greater resilience during economic uncertainties, primarily due to the imperative nature of providing most healthcare services in person. Consequently, investors are increasingly drawn to MOBs as a stable alternative to suburban office holdings, often considering them a “safe haven” investment in turbulent times.

Due to provisions in the Tax Cuts and Jobs Act of 2017, some owners of medical office assets may qualify for accelerated or bonus depreciation. Those who qualify could receive a larger tax deduction for bonus depreciation. This benefit can help investors offset gains elsewhere in their portfolio.

Though all investment situations and properties are different, this tax subsidy may allow investors to take bigger deductions and pay fewer taxes on their investments in the early years. If investors qualify, this benefit can help them invest in more than one real estate property.

Investing in medical office buildings (MOBs) offers unique advantages driven by the nature of healthcare tenancy and demographic trends. MOB tenants, often comprising healthcare professionals like doctors, dentists, and specialists, typically possess strong credit profiles, bolstering the stability of these investments.

Moreover, these tenants prefer proximity to hospitals and other medical facilities, fostering a mutually beneficial ecosystem that attracts additional healthcare providers seeking to join established networks.

The specialized infrastructure and services offered by MOBs make frequent tenant relocation impractical, leading to long-term lease commitments or lease renewals, ensuring stable occupancy for investors. Additionally, the aging baby boomer population contributes to sustained demand for healthcare services outside traditional hospital settings.

As this demographic seeks preventive healthcare and medical treatments, MOBs stand poised to meet rising demand.

As an investor, you’ve likely encountered portfolio diversification, a strategy prized for its ability to mitigate risk and enhance stability, especially during economic downturns.

Diversifying your portfolio across various asset types within real estate offers multiple benefits, ensuring that your investments remain resilient even when certain sectors face challenges.

However, it’s crucial to recognize that while diversification within real estate can buffer against specific market risks, broader economic factors like interest rate fluctuations can still impact all industries and subsectors within the real estate market.

This is where medical office building (MOB) investments shine. MOBs boast a diverse tenant mix, accommodating a wide array of healthcare professionals and services. From primary care physicians and dentists to dermatologists, plastic surgeons, urgent care centers, dialysis facilities, and digital imaging services, MOBs cater to a broad spectrum of medical needs.

The presence of such varied tenants often fosters a healthy income stream and attracts complementary businesses, enhancing the overall appeal of the investment.

When considering investments in medical office buildings (MOBs), it’s essential to weigh the advantages and disadvantages of both outdated and updated buildings. An outdated property in a prime location may offer renovation opportunities to increase its value, while a newer building in a less desirable area might face unique challenges.

Adaptability to evolving technology is crucial for MOBs to remain competitive in the healthcare industry. Modern healthcare practices require flexible spaces that can accommodate new treatments, equipment, and specialties. Look for MOBs with universal room layouts that can serve multiple purposes and incorporate technologies like video conferencing for virtual patient consultations.

Additionally, an adaptable office management structure is vital for the success of modern healthcare practices. Offices should be managed in a way that is cutting-edge, organized, and flexible, allowing for seamless technological transitions.

Consider MOBs with modular designs and replicable planning strategies that can adapt to changing needs and incorporate new technologies efficiently. By investing in MOBs with strong adaptability and modern office management structures, you can position yourself for success in the evolving healthcare landscape.

When investing in medical office properties, location emerges as a pivotal factor influencing the success of your investment. Whether your MOB sits on or off a hospital campus can significantly impact patient convenience, demographics, and the overall patient population it serves.

On-campus locations hold allure due to their close proximity to hospitals and complementary services, often attracting a higher volume of patients and premium tenants. Conversely, off-campus MOBs cater to local communities, offering accessibility to patients in their residential and work areas.

In real estate, location reigns supreme, especially for medical office buildings. Proximity to main roads ensures increased traffic and visibility, translating to enhanced business opportunities. Optimal locations situated in high-population areas provide patients with easy access, emphasizing convenience, a significant draw for medical facilities.

Geographic considerations are paramount, with states boasting mild climates, like California, Arizona, and Florida, attracting a demographic with a higher demand for healthcare services. These areas see a notable influx of baby boomers and active lifestyle-oriented families, further fueling the need for medical care, thus solidifying the investment appeal of MOBs in such locations.

A prime location not only attracts high-quality healthcare providers but also maximizes exposure, contributing to the profitability of the healthcare center. Providers seek locations that ensure visibility and accessibility, ultimately making a healthcare facility a lucrative investment opportunity.

When evaluating a medical office building (MOB) investment, the facility’s size holds considerable significance, influencing tenant preferences and investment risk. Understanding the building’s capacity and potential for expansion is crucial for making informed investment decisions.

A large building tailored for a single tenant may pose higher risks for some investors, whereas a multi-tenant structure may offer greater security. Assessing the building’s size involves examining multiple factors, such as the number of healthcare providers it can accommodate, space availability for advanced technologies, the capacity of the patient waiting area, and the adequacy of parking spaces.

Investors should also consider the potential for future growth and expansion. Questions regarding the building’s size and scalability include:

• 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?

Additionally, it’s essential to explore the property’s potential for expansion. Does the existing infrastructure allow for future growth, or is there available land for expansion if needed? A smaller property with expansion possibilities may present more appealing prospects to healthcare providers compared to a larger facility with limited growth potential.

As with any real estate investment, looking at the tenant profile is important. Depending on what the tenant does, you may have potential barriers and risks when entering the local marketplace. For instance, look at whether the tenant is part of a physician group and review their credit profiles and history in the local market.

This information can help you understand how the tenant fits into the community and the specific MOB space you’re investing in. For instance, urgent care facilities that offer general services may be more successful from the start than a highly specialized practice, such as an endodontist or orthopedic surgeon.

Investing in MOBs demands a nuanced understanding of tenant requirements, which can vary widely across different medical practices. Some tenants may necessitate specialized equipment, such as medical imaging machines or oxygen concentrators, for efficient practice operations. Given the operational needs of medical facilities, considerations regarding electrical demands, setup requirements, and access to water sources are crucial.

While investing in MOB properties may seem daunting without specialized knowledge of medical office operations, options like Delaware Statutory Trusts (DSTs) offered by platforms like 1031 Crowdfunding provide turnkey solutions.

DSTs enable accredited investors to acquire assets while entrusting property and asset management to experts. The passive management and income potential of DSTs make them appealing to investors, rendering MOB investments eligible for 1031 exchanges.