Medical office buildings have emerged as an attractive investment asset class in recent years. With an aging population and increasing healthcare spending, medical office buildings provide stable cash flows and growth potential. However, investing in medical offices also carries risks related to changes in healthcare regulations, reimbursement rates, and tenant credit. This article will examine key factors to evaluate when assessing medical office investment opportunities.
Understand demand drivers and growth projections for medical office space
The demand for medical office space is primarily driven by population growth, aging demographics, and utilization trends in outpatient care. Investors should analyze factors like projected population growth, aging trends, and shift towards outpatient care in the target market. Markets with higher growth in 65+ population and steady increase in outpatient visits per capita offer better prospects. Investors can also assess the physician density and coverage of major health systems in the area.
Evaluate location based on accessibility, anchor tenants, and density of healthcare activity
Medical offices rely heavily on foot traffic so proximity to hospitals and anchor tenants like imaging centers or ambulatory surgery centers is critical. Areas with higher healthcare activity and a cluster of complementary medical tenants generally command higher rents and lower vacancies. Suburban locations near affluent residential areas are preferable over rural and isolated sites. Proximity to public transit and parking availability also enhance accessibility.
Analyze lease terms and portfolio tenant mix
The lease structure and tenant base impact cash flows. Include assessments of: average lease term remaining, rent escalations, renewal options, tenant financial strength, diversification across medical specialties, and concentration of top tenants. A diversified tenant mix with longer leases from investment grade tenants ensures reliable income.
Understand regulatory and reimbursement risk factors
Changes in healthcare laws and reimbursement rates from public and private insurers represent a key risk. Policy changes that reduce reimbursements or constrain development may negatively impact property fundamentals. Evaluate exposure to different payor mixes and analyze recent regulatory changes.
Conduct due diligence on property condition and financials
Assess critical building systems, scheduled capital expenditures, occupancy costs and net operating income. Medical offices have higher improvement costs for ventillation, plumbing and compliance with ADA regulations. Review rent rolls, operating expenses, and leverage ratios to identify properties with stable cash flows.
Medical offices can provide stable income streams but require deep healthcare market knowledge. Assessing key factors like demand drivers, location, tenants, regulations, and property fundamentals allows investors to make informed decisions.