5 Things You Need To Know When Investing in a Medical Office Building

May 23, 2024

Medical offices have quickly become one of the most popular investment options for commercial real estate (CRE) — especially after the pandemic highlighted the importance of America's healthcare system. What was once seen as a niche market is now at the forefront of CRE investing, fueling major healthcare providers to expand their presence in local communities and driving strong returns for investors.

This trend is expected to continue, with a predicted annual growth rate of 10.4% from 2023 to 2027, pushing the market’s volume to an estimated $85.95 billion in a few years. This rapid expansion presents a lucrative opportunity for investors in medical office buildings (MOBs) — but only if they understand how to navigate these unique properties. 

Why Medical Offices Are a Good Investment

Here are the key reasons why medical office buildings stand out as a strong investment opportunity compared to other types of real estate:

  • Recession-proof demand: Medical office buildings house essential healthcare services, which are always in demand, regardless of economic conditions. People need medical care whether the economy is booming or in a downturn, making this type of real estate less vulnerable to market shifts.
  • Consistent cash flow from insurance: Healthcare providers receive reliable payments from insurance companies, including government-funded programs like Medicare, and Medicaid. These payments are stable and often increase annually, ensuring that healthcare tenants maintain consistent revenue, which leads to steady rental income for investors.
  • Long-term leases: Medical office tenants usually sign long-term leases due to the difficulty of relocating medical equipment and the potential disruption to patient care. This creates a predictable and stable income for property owners and investors.
  • High occupancy rates: The construction of new medical office buildings is slow compared to other property types, reducing competition. This keeps occupancy rates high, typically around 90% or more, with a reliable stream of tenants.
  • Growing demand due to the aging population: With the aging population in America, the demand for healthcare services is expected to increase dramatically over the next decade. This will drive greater demand for medical office space, making it a promising long-term investment.

Medical Offices vs. Hospitals  

Medical offices and hospitals serve different purposes, which are reflected in their infrastructure, costs, and financing needs. While these facilities may operate in proximity, medical offices primarily focus on outpatient care, handling less-intensive procedures and not supporting overnight care. In contrast, hospitals provide comprehensive care, including emergency services, surgeries, and inpatient treatments, requiring more complex infrastructure and higher capital investments.

Here’s a table that highlights the key differences between medical offices and hospitals:

table

Aspect

Medical Offices

Hospitals

Type of Care

Outpatient care (routine procedures and day surgeries)

Inpatient and outpatient care (including major surgeries and long-term recovery needs)

Emergency Services

No emergency rooms

Full emergency services available

Overnight Stay

No overnight stays

Patients can stay overnight for recovery

Procedures

Less complex (focused on outpatient procedures)

Highly complex, such as emergency rooms and operating rooms

Capital Costs

Lower capital costs (simpler design, fewer specialized requirements, and lower maintenance expenses)

Higher capital costs(complex infrastructure, advanced systems, and higher construction and upkeep expenses)

Financing Sources

More straightforward, less specialized financing due to lower capital costs and simpler infrastructure needs. Here are some financing options:

  • Traditional bank loans
  • Private equity
  • Real estate investment trusts (REITs)
  • Small Business Administration (SBA) loans
  • Commercial mortgage-backed securities (CMBS)

More complex financing, often involving larger loans or partnerships due to higher infrastructure costs and specialized medical requirements. Here are some financing options:

  • Government or public funding
  • Tax-exempt bonds
  • Institutional investment
  • Syndicated loans
  • Public-private partnerships (PPPs)

Aspect

Type of Care

Medical Offices

Outpatient care (routine procedures and day surgeries)

Hospitals

Inpatient and outpatient care (including major surgeries and long-term recovery needs)

Aspect

Capital Costs

Medical Offices

Lower capital costs (simpler design, fewer specialized requirements, and lower maintenance expenses)

Hospitals

Higher capital costs(complex infrastructure, advanced systems, and higher construction and upkeep expenses)

Aspect

Emergency Services

Medical Offices

No emergency rooms

Hospitals

Full emergency services available

Aspect

Overnight Stay

Medical Offices

No overnight stays

Hospitals

Patients can stay overnight for recovery

Aspect

Procedures

Medical Offices

Less complex (focused on outpatient procedures)

Hospitals

Highly complex, such as emergency rooms and operating rooms

Aspect

Financing Sources

Medical Offices

More straightforward, less specialized financing due to lower capital costs and simpler infrastructure needs. Here are some financing options:

  • Traditional bank loans
  • Private equity
  • Real estate investment trusts (REITs)
  • Small Business Administration (SBA) loans
  • Commercial mortgage-backed securities (CMBS)

Hospitals

More complex financing, often involving larger loans or partnerships due to higher infrastructure costs and specialized medical requirements. Here are some financing options:

  • Government or public funding
  • Tax-exempt bonds
  • Institutional investment
  • Syndicated loans
  • Public-private partnerships (PPPs)

5 Things To Consider When Investing In Medical Office

Medical offices are not like typical commercial buildings. They require specific designs, specialized regulatory review, and complex mechanical systems, making them a unique — sometimes challenging — investment. Here are five other things to know when investing in a medical office.

1. Hospital Affiliations Drive Asset Value

Hospitals and medical office buildings serve different purposes, but many hospitals are now opening satellite locations where doctors can treat patients outside of the main hospital. These satellite medical offices often handle things like diagnostic tests and imaging, usually at a lower cost than at a hospital.

Whether a medical office is affiliated with a hospital is important for investors. Hospital-affiliated MOBs tend to have higher value because they offer greater tenant stability. In these cases, the hospital, not individual doctors, leases the space, resulting in lower risk for investors. 

Medical offices not directly connected to hospitals can still be a good investment, especially if they are located close to a hospital. Properties within 250 feet of a hospital can charge higher rents because Medicare and Medicaid reimbursements are 40% higher for services provided in these locations compared to those farther away. This makes them an attractive option for investors looking for a balance of lower costs and strong returns.

2. Healthcare Reform’s Impact on MOB Demand

While there is broad-based demand for medical office facilities nationwide, MOB investors should understand some specific drivers of demand:

The first consideration relates to modern healthcare reform, specifically the Patient Protection and Affordable Care Act ("Obamacare") in 2010. This legislation resulted in 32 million more Americans being covered by healthcare insurance. As a wave of newly insured patients began seeking out medical care, demand for medical office space skyrocketed.

Another major factor to consider is location. As the old real estate adage goes, "location, location, location" ─ and medical office space is no different.

Location is perhaps the most important factor for investors to consider when purchasing or building a new medical office facility. Investors will want to pay close attention to demographics, from the average age and income of local patients to the rate of people who are insured privately. Investors need to pay attention to these details because medical offices in areas with higher rates of privately insured patients are more appealing to healthcare providers as private insurance is more profitable than Medicare and Medicaid. By focusing on medical offices in these high-demand areas, investors can count on long-term tenants, steady rental income, and better property value growth.

Assuming there is sufficient demand from local patients, the immediate location and accessibility of a MOB is of next consideration. A well-located property that’s easily accessible from major roadways with plentiful parking is more desirable than one that is isolated from patients and nearby hospitals. Two medical office buildings with the same amenities providing the same level of care will perform drastically differently if one is perceived as a more convenient option for patients — and tenants will happily pay higher prices for premium locations.

3. Impact of Space Utilization on Investments

Medical office investors need to understand how the building space will be used. Some facilities, for example, are designed for a single tenant, where that tenant may request custom features to meet their specific business needs. While this can increase upfront costs, it often leads to higher rent and longer-term leases, providing more stable and predictable income for investors. Other spaces may be more suitable for dividing and renting to multiple providers, allowing for diversified income streams and reduced risk if one tenant leaves. Both strategies can benefit investors by maximizing rental income and ensuring occupancy.

4. ‍The Relationships Between Health Systems and MOB Investors

Hospitals are under pressure to reduce costs, and one of the primary ways they can do so is by selling off property that isn’t being managed effectively or requires significant capital expenditure to update. 


While selling off these properties may improve balance sheets, hospitals still require a long-term solution for lowering costs. Strategic MOB investors can purchase these well-located properties, optimize them, and lease them back to hospitals to provide cost-effective care without the concern of property management. MOB investors are understandably  suited better for managing any necessary facility upgrades and property needs compared to healthcare providers. It's a win-win opportunity that drives strong returns for both parties. 

5. Regulatory Approvals Process

One of the reasons the construction of new MOB facilities has lagged behind other product types is that these facilities can be difficult to permit. The first step in regulatory oversight is often a "Determination of Need" (DON) or "Certificate of Need" (CON) process, especially if the medical office building  is affiliated with a hospital. This process, typically required by state-level public healthcare departments, aims to ensure that new healthcare facilities are necessary and won’t contribute to unnecessary healthcare spending.

Once the facility is complete, the space will then undergo a series of inspections. Individual tenants may be required to obtain certain licenses before they can begin seeing patients.

By overseeing the expansion of healthcare infrastructure, states can help prevent costs from spiraling out of control. The DON/CON process also plays a crucial role in coordinating the planning of new services and construction, which can affect the size and scope of individual MOB projects. Once this process is completed, state healthcare departments often oversee a second set of regulatory approvals for the project.

This regulatory process ensures thoughtful planning and alignment with community needs, and while it can take anywhere from six months to a year (or more), it ultimately leads to well-coordinated, high-quality healthcare facilities that benefit both providers and investors in the long term.

Smart Investors Are Turning to Medical Office Buildings

Medical office buildings offer a unique investment opportunity for those who know how to navigate the industry. At Alliance, our 30 years of investment expertise and access to exclusive off-market deals ensure that your investments are positioned for success. Ready to explore the benefits of medical office real estate? Let's build your portfolio together.

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