Discussing the possibilities and future at the intersection of healthcare and commercial real estate
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Today’s episode is my interview from the Freedom Formula for Physicians podcast with David Dennsion. Dave’s practice has a high concentration of physician clients and he asks me about the value of healthcare real estate assets.
[3:29] My journey and how I grew up
My professional experience totals close to two decades. After graduating from university, I uprooted to Phoenix. I began my career in software development, but with the bursting of the dotcom bubble, I became dissatisfied with the tech community. Although I witnessed my mother succeed in residential real estate, I decided to pursue a career in commercial real estate. I chose against working in residential real estate and instead pursued a commercial real estate license. In response to this emerging demand, she launched DOCPROPERTIES.
[6:23] My mom’s real estate journey that led to my interest in real estate
My mother got her start in the residential real estate business, but I quickly realized that was not the field for me.
[6:50] The deciding factor to go into commercial real estate rather than residential
Seeing my mother work in residential real estate, hearing about the endless stream of appliance breakdowns, and the need to be on-call at all times all made an impression. I became interested in commercial real estate since dealing with all the issues that come from residential real estate is the last thing I wanted to pursue.
[8:29] Experience with traditional office versus medical office
Apartments, multifamily housing, land, office space, manufacturing facilities, and retail businesses make up the traditional categories of commercial office space. Those working from home have become more of a trend in recent years, and traditional offices need to figure out how to pivot away from the pandemic. Additionally, Phoenix is the area with the second-fastest growth, and there has been a surge in the number of people investing in real estate there.
[13:30] Has there been a change in medical in terms of space versus the knowledge workers?
The medical sector is currently one of the most attractive asset sectors to invest in during the pandemic. During that time, elective surgeries needed to be put on hold for approximately six weeks, but fortunately, landlords and renters were able to receive assistance in regard to PPP. Investors are always looking for periods of stability, and this time period had a lot of it. Between 94 and 97% of landlords indicate their renters have maintained their payment of rent throughout this time.
[15:18] How would the conversation go if the question was posed about investing and a potential client felt as if they didn’t have enough to invest with?
Renting is strongly advised in this situation, providing this person with some breathing room in order for them to evaluate the market, evaluate the inventory, and determine which boxes they check off. Investigating the possibility of adapting existing structures to their needs while renting space in the meantime while they determine their long-term goals.
[19:26] Some of the terminology for those physicians that want to get familiar with real estate and are just starting out
When renting a location, it is important to have a good understanding of the rental rate, as well as whether or not it is competitive with the rental rates of other buildings that are comparable to the one being rented, and the running costs associated with the location.
[28:26] Does the price change according to geography?
The same as with other types of real estate, the prices have a tendency to go up if the property is located closer to the core of the city and has a larger population density; this indicates that there is a limited supply. Additionally, depending on the area of medicine that you practice, the closer you are to the hospital, rather than the further away you are, is preferable. However, this also depends on whether you are serving a community and whether you’re located in a prime retail location within that community in order for the value to be maintained.
[33:29] What to expect for a low end medical office in the suburbs
Right now, the typical capitalization rate for medical offices across the country is about 6%. They are much more condensed than before. And finally, the elements stated have an effect on cap rates. As was said before, the quality of the building and quality, that trend, and the length of the leases were all taken into consideration.
[34:31] What is the difference between a medical office building and a surgery center?
A surgery center will get a higher value because the cost to build out a surgery center is probably twice the amount of a regular medical office. Therefore, surgery centers are hard to move. They’re expensive to move. Some states have certificate of needs, which means that they don’t want too many surgery centers. Surgery centers get higher value because there’s not as much supply as medical offices are one thing they’re in, they’re very expensive to move in, they’re highly specialized build out. They’re expensive to build out.
[35:56] The number one mistake that people make in buying a medical office building
Not having a complete idea of the costs involved in purchasing a new building, developing a structure, or actually comprehending the cost, especially at this time with construction costs, is a common mistake people make when buying a medical office building.
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