Medical Real Estate Rx: Your Prescription for Realty Value

By: David Ballard, CCIM, and Parker LaBarge
Monday, January 18, 2016

The San Antonio medical office real estate market has evolved in response to our city’s influx of new residents, increases in healthcare needs for our growing senior population and healthcare reform changes.

On a national level, real estate investments are predicted to have increased by at least 50 percent in 2015 when compared to 2014. Although a majority of transactions are attributable to real estate investment trusts and institutional investors, owners and occupiers account for about 13 percent of deals.1 The environment has proven ripe for healthcare providers to participate in real estate investment opportunities.

The healthcare, medical and bioscience sectors account for $24.5 billion per year of San Antonio’s economy, and these sectors employ one in every six people of our workforce.2 There are approximately 6.9 million square feet of medical office space in San Antonio with about 1.3 million square feet (19 percent) of that vacant.3 The total amount of square footage will increase due to buildings that are under construction or proposed with plans for construction in 2016. Not only is San Antonio one of the fastest-growing cities in the country — a change that creates a need for more physicians to expand their practices in areas to accommodate the growing population — but physicians and physician groups are looking for ancillary income, with real estate being a driving force.

In 2015, we saw an increase in private practices seeking real estate ownership opportunities either collectively in larger buildings or individual spaces. The low interest rates made ownership very attractive, especially when compared to rental rates. However, drawbacks are commonly overlooked when purchasing property, such as the additional ownership responsibilities of common area maintenance, insurances and taxes. Additionally, ownership opportunities are not always advisable, as investment planning must be tailored to practice longevity and practice areas.

Providers who lease their office space typically review their tenancy contract once every five to 10 years after they are contacted by the landlord to renew. However, it becomes a challenge for healthcare providers to weigh the costs associated with moving versus renegotiating their lease terms. In the event of renegotiating, providers are often uneducated about what other tenants are paying in their building or if a tenant improvement allowance is an option. These are all items that directly affect the profitability of a practice.

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For healthcare providers, differentiating real estate from one’s general practice is essential. Real estate is typically a provider’s second highest expense behind payroll. However, healthcare providers almost always enlist outside assistance on these expenses while they often overlook the necessity for professional real estate counseling. Whether individual providers or practice groups continue to lease or own, it is essential to consult with professionals who possess market knowledge so that healthcare providers can best navigate their real estate options.

For any of your real estate needs, please call 210-930-4111.