Capitalizing on Demand: Lease Optimization and Property Management in the Medical Office Sector

by | 28 July 2023

Despite weakening fundamentals in the office sector, the medical office market remains active. While traditional office properties are approaching record high vacancy, GlobeSt. reported earlier this year that the growing demand for outpatient services “put national occupancy rates for medical office buildings at a historic high.”

Medical office buildings serve as critical infrastructures that support the healthcare industry, providing essential spaces for healthcare professionals to deliver patient care. Managing these properties requires a unique set of skills and considerations to ensure smooth operations, regulatory compliance, and a safe and inviting environment for both healthcare providers and patients.

The flurry of ongoing activity and demand among occupiers gives landlords and owners of these spaces opportunities to optimize lease terms and implement cost-saving initiatives. 

Optimizing Lease Terms

In the world of commercial leases, there is a crucial aspect that can sometimes go unnoticed by tenants: the ability of landlords to amortize capital investments back to them, particularly for energy-saving projects.

Implementing initiatives like LED lighting, BAS enhancements, and HVAC equipment upgrades are a few of the capital bill-back investments landlords may include.  Other utility-related clauses tenants may overlook is the landlord’s ability to bill for high-usage equipment or running after-hours HVAC, for instance.

For landlords, while medical office buildings are widely considered “recession-proof”, the current economic environment has some owners facing financial hardship or mounting debt. Exploring ways to optimize lease terms or ensure reliable tenancy during the recent banking crises is crucial.

For tenants, as healthcare staffing wages continue to rise, noting these potential expenses could be key during lease negotiations or for controlling occupancy costs.

Whether you find yourself on the tenant or landlord side, this issue presents an interesting discussion in the realm of commercial real estate.

Other Property Management Considerations

Investing in medical office buildings can be a lucrative venture, but it also comes with unique challenges and considerations due to the specialized nature of healthcare facilities.

Medical offices can have an entirely different set of operating standards than other businesses to comply with industry regulations such as ADA and HIIPA to ensure patient privacy and accessibility. Fire safety codes, environmental health standards, preventive maintenance, and safety protocols are some of the other crucial aspects property managers must stay up-to-date with.

Finally, strong tenant relationships are the cornerstone of successful property management. The average lease term in medical offices is 19 years, compared to an average of 4.3 years for general offices in the U.S., according to GlobeSt., so entering an optimal agreement with a reliable tenant is crucial.

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