Medical Office Investing

9 Replies

Dear All, 

I am a residential RE investor with an interest of expanding into Commercial Real Estate. I am specifically interested in small Medical Offices in the San Francisco Bay Area. Totally new to this so please let me know if you can point me in the right direction towards resources, information, etc. Looking forward to hearing from you!  

Warmly, Ann 

Whatever your equity budget is, I would double it. The build out and demands of doctors are not cheap especially in CA. Hire a good broker and lawyer. 

Greetings @Account Closed ,

The medical industry is relatively recession proof, which is great for landlords. However, this means medical use properties typically command a premium especially in the Bay Area. I would recommend looking in Downtown San Jose and Morgan Hill/Gilroy for offices that are zoned for medical uses. Another option would be to look into the Greater Sacramento market which will be priced lower with equal or better returns if you can invest in the right neighborhood.

@Account Closed is correct that the medical industry is fairly recession proof.  The problem is that a lot of private practices are being slowly pushed into oblivion by insurance carriers and hospital systems for a multitude of reasons that are beyond the scope of this thread.  As such, practices owned by hospital systems will NOT be renting from you - they will be situated in office space owned (or to built) by the hospital system itself.  So you need to know the local medical community - is it heavily private practice (which is becoming rare)?  Or is it heavily hospital owned practices (or groups like Kaiser for example)?  In addition, you will be paying a very high premium for office space near hospitals, so watch your numbers carefully.  But this is not nearly a "sure thing" compared to 10 years ago, and much riskier now.    

Hi Ann, what is your budget/what size building are you looking for? I actually specialize in MOB sales and have been involved in $650M in sales over the past 7 years. Unless if you have very deep pockets, I wouldn’t recommend buying anything in the Bay Area. MOBs are inherently valuable wherever they’re located due to the fact that the tenants rarely move, healthcare is expanding with aging baby boomers, the tenants make tons of money and they spend tons of money on their tenant build outs. I’d recommend buying a single or multi (2-5) tenant building out of state to get your feet wet in the sector. You’ll have professional commercial property management in place (much better than the residential/multi family managers), your returns will be much greater and you’ll still have one of the top 3 most stable assets classes. Feel free to DM me if you’d like to discuss in further detail.

Thanks @Eddie LeGrand-Sawyer, @Michael S., @Ronald Rohde, for the notes of caution and advice. From quick calculations, the numbers certainly don't look as good as MFRs, and financing also looks expensive compared with residential loans. Looking at my intended clients (non-invasive procedures only), I don't necessarily have to have a MOB, but the OB must be close to hospitals, and I could develop some units into MO for the right tenants. Definitely looking at smaller buildings (2-5 units) only. 

@Account Closed What are your goals for your acquisition? Medical may seems expensive, but any commercial property will have higher cost loans than a typical multi-family investment. With medical office, however, you get long term leases (typically 5-10 years) and extremely stable tenants. Also the average cap rate nationwide for stabilized medical office properties was 6.7% last year and the vacancy rate was only 8.7%. Even now with interest rates rising, I'm currently proposing on a 10 year single tenant NNN super simple deal in CA at a 7% cap. If you want to be extremely safe and buy a 10+ year NNN leased health system credit rated deal, you can find them all day in the 6-6.75% cap rate range nationally. If you wanted a little higher return, stabilized multi-tenant deals with around 5 year remaining lease terms are currently trading in the 7.5% range.

From my personal experience, it's been tough in recent history to find any multi-family deal in the Bay Area worth buying at less than a 4% cap and MOBs offer almost as much stability/upside and much less management responsibilities.   

@Alex Vidal thanks for providing those details, as I am also reviewing MOBs. I’m surprised you can get a 7% cap take for a CA MOB. I thought they would be lower, in the 5% range (but maybe because I was seeing stuff in San Francisco and peninsula?)

At any rate, do you have a range of what is the typical annual percent rent increase for MOBs? I imagine that the compressed rate for multi family (in prime Bay Area locations) is due to the upside in rents, and hence appreciation potential vs MOBs?

@Amit M. MOBs are definitely attractive because of the higher yield, stability and lower management responsibilities. We’ve seen a lot of investors 1031 out of apartments into the MOB sector in recent years. I have mountains of historical MOB data (both national and based on regions/MSAs) and I write a bi-annual national medical office newsletter covering sales, development and other trends. DM me your email and I can send you my contact info and some data for you to review.