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
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?
Yes, I'm looking at long term cashflow. The current rent is the wow factor, but if it's above market and renewal time arrives your increase won't be as much. Or rather it'll be slower growth because you're already above the market.
The 1031 timeline will be interesting to say the least! This is my first 1031, so we'll see how this goes! I don't feel pressure from a timing point of view. I am not going to go into a crap purchase just to let the tax tail wag the dog. I'll buy something that makes mathematical sense, do a DST, or pay the taxes. Or some combination of the above. This is TBD.
BTW, I dislike paying taxes a lot. Which I'm sure 99.999999% of the people here feel the same. But, I tell myself that paying taxes is a good thing. It means you're making money. At least it's a lie I tell myself that's somewhat truthful though not ideal.
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.
Coming at this from the lending side, here's how medical office actually gets underwritten today, which also explains where the pricing gaps are.
Lenders aren't treating "medical office" as one thing. A multi-tenant building on a hospital campus with health-system tenants is priced like a core asset. A 6,000 sf building leased to one dentist or a PT group is underwritten mostly on that one tenant's credit and the cost to re-lease. That second group is where buyers find better basis, but it's also where deals fall apart at the bank.
What I'd look at on the smaller and older buildings:
- Lease term versus loan term. If the main tenant has 3 years left and you want a 10-year loan, expect a cash sweep, a TI/LC reserve, or lower proceeds. Getting a renewal or extension done before closing is often worth more than negotiating price.
- Debt yield, not just DSCR. With rates where they are, a lot of medical deals hit 1.25x at a low enough loan amount that the leverage is disappointing. Lenders are quietly underwriting to a 9–10% debt yield on single-tenant and small multi-tenant medical. Run that number before you make an offer.
- Rent-to-sales or rent coverage on practice tenants. On the doctor sale-leasebacks Bob mentioned, the lender will mark rent to market if the practice can't show it covers the above-market rent comfortably. Ask for the practice P&L. If occupancy cost runs much above 8–10% of collections for dental or general medical, assume the rent gets haircut at renewal.
- Owner-user exit. Older and smaller buildings have a second buyer pool, which is practices buying with SBA 504 or 7(a) at 10% down. That's a real support for value that institutional-sized buildings don't have. Lenders give you some credit for it informally, and you should count it as an exit.
On "are people overpaying": at a 6.5–7% cap and a 6.5%+ loan rate, many listed deals have flat or negative leverage, so the buyers paying up are 1031 money or all-cash. If you need debt to make it work, the opportunity is usually in the deals with a lease problem you can fix, like a short term, a vacancy, or a below-market rent. Most buyers and lenders avoid those for now.
The bifurcation is real, but medical office is not immune to it. On-campus, health-system anchored MOBs with 7 to 10 year WALT and strong guaranties are trading in the 5.25 to 6.00 cap range. Off-campus multi-tenant deals are more like 6.50 to 7.50, and older value-add product with rollover is 7.50 to 9.00 depending on market. The problem with most current asks is the debt math. At a 5.75 cap, 65% LTV, 6.50% fixed rate and 25-year amortization, the debt constant is roughly 8.10%, which puts DSCR around 1.09x. Even at 60% LTV you are only around 1.18x. That is not institutional leverage; it is a 1031 bid. If a broker is pitching a 5.50 cap on a 10-year WALT off-campus building with 30% to 40% rollover in the next 24 months, I pass.
The value is not in the "medical" label. It is in functional buildings with below-market rents and leases that are underwritable. Smaller and older can work if the exam room count, plumbing, ADA, ceiling height, parking ratio and generator backup fit the tenant demand, and if the building sits adjacent to a hospital or health system campus. I will pay for that. I will not pay for a generic 1980s off-campus building in an oversupplied corridor with 5,000 sf floor plates and weak parking. Doctor-owned sale-leasebacks can be a good source, but you have to underwrite the practice credit, payer mix, partnership buyout risk and market rent, not just the personal guaranty. TI and LC are real: $50 to $100 per sf for medical buildout, plus leasing commissions and downtime.
The 1031 waiting game is exactly right. I would not underwrite cap compression to make a deal work. Assume rates stay flat or higher and solve for basis. The opportunities I am seeing are off-market doctor-owned buildings, health system adjacent older assets with mark-to-market rent, partnership recapitalizations and assumable debt. If you cannot get 100 to 150 bps of spread to the debt constant or a 1.25x DSCR at 60% to 65% LTV, the "safe" medical premium is just overpayment.