Where’s the value in medical office right now?
Darren NakosPro Member
Denver, CO · Member since 2026 · 24 posts · 10 votesI've been reading a few recent market reports and I've noticed one thing that keeps coming up, which is that office is starting to recover, but not everywhere. Newer buildings in good markets are doing well but older buildings in oversupplied markets are still having a tough time. Lenders are also being more careful about which deals they take on.
Medical offices seem to be holding up better because people still need to see their doctors, tenants tend to stay longer, and the income is generally more predictable. I think buyers have caught on to that, and it seems that more people are competing for the same types of properties.
It got me thinking: if everyone sees medical office as a safer investment, are buyers starting to pay too much for it? Could some of the better opportunities be in the smaller or older buildings that other buyers overlook? For those working in medical office, are you seeing the same thing? Where are you finding good opportunities right now?
I think medical will be in demand simply because it can't be internet'd. Yes, you can do telehealth for general things. But most of the time you need to go in to have the doctor see you. This was my thesis when I started investing in commercial real estate.
We're selling one of our properties (Got a great unsolicited offer on it and we have a signed LOI. PSA is pending) and I'm hunting around for quality medical properties for a 1031 exchange. So far, not much out there. The cap rates would dictate negative leverage at the current asks.
I think (and my broker agrees) is that most sellers are holding tight. They're looking for a desperate 1031 buyer who will overpay. So it's really a waiting game at this point. So either the cap rates will need to compress a bit, or rates will need to come down. I think it'll be the former vs. the later given the macro economy.
Another thing I'm noticing is there are doctors that own the property they practice in. The practice has done well and the doctor is looking to retire. They can't sell the practice and the property as it would cost the junior partners too much cash. So we're seeing doctors list the property with a rent back. The interesting thing here is that the rent seems to be for above market rates so the doctor can sell the property for more money and let the practice make the rent payments. No biggie if you cash out on the building and sell the practice to the other doctors. The rent isn't your problem in a year or 2.
I think you can purchase an older building, class B or C and rent it to a dental practice or a smaller medical practice. The price you buy the property for and the rents will be correlated. If you buy a newer nicer A property, you'll get more rent, but your pool of renters will be smaller as well. So pros and cons to each.
Long story short:
-still a believer in medical properties
-older or newer building doesn't matter, the location, demand, and the math matters
-in the process of selling and starting to look for another property or 2 to get into -- it will be medical related
Hi Bob,
Thanks for sharing this. I agree with your take on medical real estate. Telehealth has its place, but there’s only so much you can do remotely, and I think that’s a big part of what makes medical properties interesting as an investment.
The rent-back situation is interesting. I hadn’t thought much about that, but I can see how it would help a retiring doctor get more out of the sale. When you look at those deals, are you focused more on what the space could rent for once the lease ends or on the current rent?
I’m also curious how the 1031 timeline factors into your decisions. With sellers holding firm and so few properties penciling out, do you feel pressure to find something before the deadline, or are you comfortable waiting for the right deal?
Bob's experience lines up with what I see. One thing I'd add on underwriting these: the lease matters more than the building.
Medical buildouts are expensive. A clinical space can easily run $50 a foot or more in TI for exam rooms, plumbing, and procedure space. That's fine while the tenant stays. It hurts when they leave, because the next medical tenant will want you to fund the buildout again. So I look hard at remaining term and real renewal odds before I trust the rent.
On the doctor-owned leasebacks Bob described, verify the practice's financials, not just the rent. Ask for a couple years of P&Ls. Above-market rent from a retiring doctor only holds up if the practice keeps producing after he steps back. A personal guarantee and a real non-compete carry more weight here than in most asset classes.
And yes, I think you're right about the smaller, older buildings. The ones near a hospital campus that are too small for institutional buyers. Dental, vet, PT and behavioral health tenants don't need a Class A lobby. They need parking, visibility and a landlord who picks up the phone. Lower rents, but a much lower basis and thinner competition to buy.
med office is a big asset class, we generally look at it in a couple different lenses. the hospital, or remote ED or ambulatory centers, the retail based urgent cares, out parcel dentists etc, the retail adjacent "light build out" the phycologists, trt centers etc, and then the retail or hospital adjacent specialty centers with "heavy buildouts" ie surgery centers, specialists with a full med buildout to some extent.
They all need different real estate needs, and customer profiles, and as such if investing in a building targeting one of these, get very clear on which one you are targeting as re-leaseing and re-tenanting a property even within the retail med space can still mean big TIA dollars.
@Bob Dole Your read that sellers are waiting for a motivated 1031 buyer matches what I'm hearing from other owners. When asks don't pencil, some exchangers name a backup inside the 45 days, sometimes a DST interest, so a missed closing doesn't turn into a taxable sale. That isn't right for everyone, since you give up control, but it's worth discussing with your QI before the clock starts. Hope the PSA comes together smoothly.