Healthcare real estate in a post-COVID market

Colin Carr

How has the pandemic impacted healthcare real estate? And what does that mean for physicians occupying or looking for space?

The pandemic has affected the vast majority of healthcare practices and brought a reason for every provider to revisit both the physical footprint of their facilities and the economic terms of their lease or mortgage. But despite the obvious challenges, the healthcare real estate market has remained as resilient as any other commercial sector, thanks to long-term leases, exceptionally minimal default rates, stable occupancy, low interest rates and in-demand tenants.

One of the most positive impacts we’ve seen is the desire for landlords to work with healthcare buyers and tenants specifically on new leases and especially on lease renewal negotiations. Medical providers represent some of the strongest and most highly sought-after prospects for a landlord or seller, both financially and professionally, and are considered low risk as compared to traditional office or retail users.

The healthcare industry was a redeeming one for many investors’ real estate portfolios during the pandemic. When optometrists opened back up, their patient’s eyes were still blurry. When dentists welcomed patients back, their teeth still needed cleaning.

What’s more, because healthcare offices invest heavily in finishing out their spaces and 10-year-plus leases are advantageous (for both healthcare tenants and landlords), landlords have been inclined to offer more favorable concessions—ones that were not as prevalent prior to COVID. Medical providers have been able to secure better lease terms because landlords want to secure tenancy and avoid the high-risk scenario of increased vacancy.

Because of their long-term stability and incredibly low default rate, the commercial real estate market tends to favor healthcare providers. Before you complete your next new location, lease renewal, relocation, or purchase, consider the following to protect your practice’s wellbeing beyond the pandemic.

The Second Highest Cost of Your Practice is Real Estate

Early in the pandemic, there was a fear of the unknown for healthcare providers considering real estate transactions. After all, some were asked to close their doors for the sake of slowing the spread. Without daily clinical requirements, what we saw as a result were a number of medical professionals choosing to focus on the business side and profitability of their practice—the second highest cost of which is real estate.

Providers can get a better deal today than prior to the pandemic, but timing is everything. If you’re considering purchasing, relocating, expanding or have a lease expiring in the next 2-3 years, it’s never too early to begin steps with a healthcare-specific and buyer/tenant-only real estate agent. And the reason is simple: The difference between a properly or poorly negotiated transaction can benefit (or cost) practices tens to hundreds of thousands of dollars. With so much at stake, experts who focus on healthcare real estate specifically help prevent blind spots, costly pitfalls, unnecessary delays, all while maximizing profitability.

Limit Your Future Liabilities

Some blind spots include often-overlooked lease clauses. COVID has heightened the awareness of (and need to protect against) worst-case scenarios. More than 80 percent of healthcare practices lease their office space, and this heightened awareness can be a good thing, especially when protecting a business from avoidable risk and liability through lease negotiations.

To limit a practice owner’s liability, two specific issues should always be addressed: lease assignability and death and disability. A primary goal of most doctors is to sell their practice as part of an exit strategy, so it’s critical that the office lease does not prohibit assigning that lease to a new owner, and equally important, to be removed from any liability of the lease through a personal guaranty. Similarly, a death and disability clause allows the tenant to be released from the commercial lease in the event of a tragic situation, protecting the doctor’s spouse, family, and estate.

Both of these clauses are fully negotiable, but the fact is that both are commonly omitted.

Other clauses to consider in your next lease are Pandemic and ForceMajeureclauses, which are common in commercial leases to protect from certain obligations during extraordinary events, like pandemics. To reap the benefits and concessions of a long-term lease while still protecting yourself against unforeseen circumstances, these are important clauses that can be negotiated by a healthcare real estate agent.

Addressing these and other liability-related clauses in a lease has always been best-practice at CARR; however, an economic crisis like COVID-19 can serve as a great reminder to parties on both sides of a transaction not to gloss over them.

Lease Renewals

You may have no intention of leaving your current building, but understanding the market, and your top options available, is imperative for creating the needed leverage with lease renewals, the terms of which rarely favor the tenant.

Most renewals are rich deals for property owners as landlords can make much higher margins on a renewal with an existing tenant compared to a new lease. When a savvy tenant is properly represented with a true real estate strategy, it’s very common for a lease renewal negotiation to contain concessions similar to what a new tenant would receive. However, getting a landlord to do what is fair doesn’t happen without firm negotiation and a strategic plan of action. And an agent’s job is just that—to level the playing field and advocate for the stable occupancy and high tenant quality of healthcare providers.

Something we’ve also seen lately for tenants who are happy in their current space is that the pandemic has created an incredible environment for current tenants to purchase the real estate they occupy. We have found many landlords, who previously were not sellers, now willing to sell their buildings to healthcare professionals who have significant term remaining on their lease. We have also seen landlords willing to condo their buildings and just sell the doctor their individual unit. If you can achieve ownership in a space you would otherwise lease, this can make a massive impact on the overall profitability of your practice, as commercial real estate is often worth more than the practice itself

Surround Yourself with Quality Advisors and Partners

There’s an ancient Proverb that says plans fail for lack of counsel, but with many advisers they succeed. All healthcare real estate is commercial real estate, but not all commercial real estate is healthcare real estate. And given the dynamic nature of the pandemic, there is no one-size fits all transaction, which means the guidance of healthcare-specific real estate agents is especially useful for market insights, leverage and profitability. Remember that while do-it-yourself commercial real estate can be tempting, the consequences can be costly—and entirely avoidable.

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Colin Carr is the Founder and CEO of CARR, the nation’s leading provider of commercial real estate services for healthcare professionals. Colin has been involved in commercial real estate for over two decades and has personally completed more than 1,000 transactions. He trains and advises thousands of healthcare professionals, administrators, investors and students throughout the country on an annual basis through national meetings, conventions, study clubs, associations, universities, webinars and more.