Four Reasons to Consider Medical Office Buildings
Commercial Real Estate
No one likes going to the doctor, but healthcare providers are an essential component to a long, successful life. Initiatives like the Affordable Care Act have allowed more Americans to obtain health coverage, making the outpatient services found in medical office buildings even more accessible while creating a supply-demand imbalance that may prove to be advantageous to investors.
Taking these variables into consideration, here are four considerations that may make medical office buildings a promising investment:
The commercial real estate world has been revolutionized by some of the latest technologies that add convenience and affordability to everyday life. These advancements have supported telecommuting and online shopping, for example, which can lead to a change in use or spatial requirements. Healthcare is one of the few sectors that continues to experience rapid growth according to Health Carousel.
Technology may allow for video conferencing, but it is no substitute for an in-person appointment with your doctor. A patient’s physical presence is also required for any procedure or treatment regimen outside of pharmaceuticals, diet or exercise. According to the New York Times, it is a simple fact that more people in the United States have access to healthcare today than ever before. This, thereby, may drive the need for more provider-filled medical office buildings in convenient, easy-to-access locations throughout the country.
Medical office buildings may also be relatively recession-proof. Consumers may pull back on dining and entertainment spending in the event of a downturn, but a bothersome toothache or a broken arm will still need to be treated.
The demand for healthcare services outside a traditional hospital setting is not going away. In fact, it is set to increase as Baby Boomers – those born between 1946 and 1964 – enter their golden years. This demographic is 75 million strong, with more than 10,000 Boomers retiring each day, according to Pew Research. The field of healthcare may tout long-term value potential as the Boomer population continues to age and the costs associated with healthcare continue to expand.
Preventative healthcare and wellness services contribute to a long and healthy life. However, as we age we generally require more services, keeping the demand for healthcare high. The average life expectancy in the United States is 78.6 years, according to a 2016 report by the National Center for Health Statistics, with women living nearly three years longer (81.1 years) than men. The National Center for Biotechnology Information notes some of the most common conditions the elderly are treated for include delirium, depression, falls, sensory impairment, incontinence, malnutrition and osteoporosis. A potential increase in doctors that specialize in treatment of these conditions may drive demand for facilities outside a traditional hospital setting such as medical office buildings.
One of the potential benefits associated with medical office building investments is its diverse nature. These facilities house a great variety of tenants, including (but not limited to) primary doctors, plastic surgeons, dentists, women’s wellness centers, dermatologists, urgent care centers, podiatrists, ophthalmologists, dialysis centers, and laboratory and digital imaging services. These tenants generally enjoy a healthy income stream from co-pays and other out-of-pocket patient expenses, as well as insurance and governmental reimbursements. Many healthcare tenants are also affiliated with hospitals or other larger integrated health systems. Medical office buildings are unique products in that successful tenants with strong patient followings may attract complementary tenants, thereby potentially enhancing the appeal of the entire asset for all involved.
Medical office building tenants tend to have strong credit, though every tenant is unique and should be evaluated on an individual basis. Medical office buildings that possess a few high-credit, long-term tenants can potentially attract even more of the same, as healthcare providers generally prefer to be situated near complementary services.
While a dermatologist may not choose to move into a building with two other like-minded providers, a medical day spa, a plastic surgery center or a cosmetic dentist may jump at the opportunity. Complementary co-tenants have the added perk of introducing an entirely new clientele to neighboring businesses.
This benefits the consumer as well. Many medical office buildings are situated in convenient, one-stop-shop locations where providers are happy to cross-promote with neighbors who are not viewed as competitors. Oftentimes they are located in close proximity to hospitals. Essentially, the strength of one’s location coupled with existing creditworthy tenants may drive interest from similar creditworthy tenants who may benefit from the overall center as well.
Location, tenant roster and the physical real estate will generally be paramount when examining a commercial real estate investment. An aging population combined with an increasing emphasis on wellness and preventative care outside a hospital setting could potentially foster an ever-growing demand for quality healthcare providers outside a hospital setting.
Medical office buildings have their own unique complexities and risk factors that an investor should carefully evaluate. Change in healthcare legislature or health insurance policies may affect demand for medical buildings, and finding new tenants may be difficult, which could cause an investment in medical office buildings to underperform. However, those medical office buildings who can offer a strong, diverse tenant mix in a conveniently located setting could be primed for success as more and more Americans take their health seriously.
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As always, investors should understand the risks associated with real estate investing and that nothing is guaranteed.