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Real Estate Market Coming Back to Life

The six partners of Memphis Internal Medicine PLLC faced a challenge several years ago. While their practice was a healthy one, they noticed their patient base had begun to erode. They had been conveniently located on a hospital campus in East Memphis for 14 years, but their offices were on the ninth floor of a medical building where elevators were unreliable and parking was tight. So when their lease option came up in 2009, they decided to consider a move.  See related story below.

“The building we found (on Wolf River Boulevard) was originally meant to be a center of excellence for cardiologists, but when the deal fell through, it was subdivided between four practices,” said Fred Pelz, MD, a partner with Memphis Internal Medicine. What sold them on the space initially was the elegant waiting room, but what made the move a no-brainer was its central location, inexpensive build-out, and parking just steps away. “It’s like a strip mall that’s convenient yet upscale. People like that,” said Pelz.

What also helped was that the market for medical real estate in Memphis had taken a dip during the 2008 recession. So Pelz and his partners were able to snap up a lease at bargain basement prices. “Rates have dropped, they’re lower than they’ve been in recent years,” noted broker Laura Carpenter who works with medical professionals through CB Richard Ellis/Memphis Healthcare Real Estate Services.

While rates continue to be lower, business has been steady and forecasters say 2011 is looking up as tensions ease around healthcare reform. “We’re seeing movement. People are looking; they’re looking at their options because rates are good right now,” Carpenter said.

If you’re considering sizing up your practice or moving to improve your location, this year might be a good time to do it.

Here are some factors to consider. According to the CB Richard Ellis Healthcare Real Estate Report from 2010, the greater Memphis area has more than 4 million square feet of medical properties available for lease in five submarkets, areas drawn around hospital locations in Shelby and DeSoto counties.

Lease rates average around $18 per square foot, though that number jumps to $21-25 per square foot for new space. Vacancy rates fluctuate from 13 to 22 percent, depending on location. East Memphis (which includes Germantown and Collierville) has the lowest vacancy rates; the University submarket (which includes St. Jude and Le Bonheur campuses) tends to be on the higher end. It’s important to consider your practice size and determine if you need to consolidate space or grow your business. Also, determine where your patient base is located. Those factors can help provide guidance as to which submarket might be a good fit.

While medical real estate has held up despite a punishing economy, landlords have had to market their properties more aggressively to appeal to prospective tenants. “Landlords will give more incentives to lease, offering a lower lease rate, free rent, or an improvement allowance; they’re being flexible with concessions,” said Carpenter.

“The old axiom of location, location, location is still important, even in medical real estate,” noted John Albright, CCIM, SIOR and partner at Investec Realty Services. “Medical tenants are still very desirable. They bring a lot to the table because they don’t move around a lot. It’s expensive to move, and patients want predictability.”

Albright and Carpenter said it helps to know the particulars of your current lease and to give your business plenty of lead time to put a deal together. Carpenter recommends starting the search process six to nine months before your lease is due to expire, so you can be in the driver’s seat. Finding the right property can take time, as does making improvements on a building, be it reconfiguring plumbing or adding cabinetry, the two big ticket items for most practices. “Unless you find move-in ready space, it’s better to give yourself a cushion of time,” she said.


Related story

Five Tips to Consider Before Making a Move

• Know what you are paying. Have your lease abstracted to learn your price per square foot, monthly cost, annual cost, any operating expense cost, and how this compares to other medical office properties in the market.

• Start early. If you are considering other property options, it is advisable to start your search 6 to 12 months in advance from your current lease expiration. This always puts the tenant in the driver seat on lease negotiations and gives adequate lead time if construction is necessary.

• Know what’s best for your practice and patients. Look at your individual practice needs and patient base to see if a better option is to have a main office with smaller satellite offices to serve your patients in outlying areas, suburbs, or rural communities. Consider time-sharing medical space or having smaller satellite clinics to better serve patients rather than having them drive to you. Consolidating offices is the other alternative that may help streamline your staffing needs by bringing all functions of the business under one roof along with the clinical practice. Again, it boils down to your needs as a practice and more importantly, your patients’ needs.

• Know critical dates in your lease. If you have negotiated items such as expansion, cancellation, or renewal options, there will be a notice date required for each option in advance. Know these due dates. It is best to have an abstract done to have a summary of these dates so you know what your options are and when you will need to make your decision.

• Rightsize. Is your file space going away after you convert to electronic medical records? Are your physicians using block scheduling and rotating to other clinics and underutilizing office space? You may need to have someone visit your office to assess your space needs to see if you need to shrink or grow.

Source: Laura Carpenter, CB Richard Ellis/Memphis Healthcare Real Estate Services

Tags:

CB Ellis/Memphis Healthcare Real Estate Service; John Albright, Healthcare real estate, Investec Realty Services; Fred Pelz, Memphis Internal Medicine, Memphis; Laura Carpenter

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