Medical facilities across all specialties and ownership types have adopted new procedures and protocols to mitigate potential coronavirus exposure, meet social distancing requirements and boost capacity. With all these changes, physical space needs may have changed enough for medical practices to reevaluate their facility needs. And this is a good time to make a facilities reassment, according to Colin Carr, chief executive officer, Carr Healthcare Realty.
It’s no longer a landlord’s market
The decade leading up to the pandemic was “100% a landlord market,” Carr noted in a recent episode of the MGMA Insights podcast, with “essentially all-time highs” in lease rates, purchase prices (e.g., price per square foot) and construction costs. Paired with hardly any major disruptors (e.g., stock market crashes, global conflicts), the market’s momentum grew with low inventories, low vacancies and lots of investors “on the sidelines” trying to invest in commercial real estate.
The economic downturn of the pandemic has shifted that dynamic for real estate: While industrial and distribution companies have seen no slowdown, retail spaces have seen “a huge pause,” Carr said.
For healthcare real estate, the good news is “the majority of landlords are working with healthcare providers to weather the storm,” Carr said, “because they know that healthcare is one of the strongest industries in the country.”
Landlords typically operate from a strong posture with tenants, but “they’re not being as bullish” these days, especially owners in markets where they’ve already had a vacancy created by the pandemic or know that some tenants will leave at the end of their leases. “Their game plan is to secure the most-qualified tenants that have the highest probability of succeeding and locking them into leases” to mitigate their risk and keep buildings occupied, Carr said.
Know your options
With more negotiating power, it might be the right time for practice leaders to downsize or rearrange their facilities if they expect to keep a significant number of staffers teleworking. Carr recommended looking into finding ancillary providers who might want to rent or lease newly open space or participate in a space-share program.
But in terms of downsizing an existing space when the lease ends, that poses some difficulty, because it’s not easy or lucrative for the landlord to join one office with another next door. The added complications of how the HVAC and electrical systems are connected from one space to another make it unlikely a landlord will view this as worthwhile.
Using leverage to score a better deal on a lease renewal in your current space is beneficial, but Carr pointed to factors that make buying or developing space more attractive in the current market:
Historically low interest rates: For any practice considering buying real estate or buying land and developing a building, the interest rates are “unprecedented,” Carr said, for both fixed and variable rates.
A commercial construction slowdown: Government, university and civic projects are slowing down, and the pipeline for future projects among commercial contractors are drying up. “We’re seeing construction costs already start to dip, and we’re seeing better pricing today than we’ve seen over the past several years,” Carr added.
Carr stressed that if your lease comes up in the next 12 to 18 months, don’t approach the decision with a preconceived notion of “we have to stay” or “we have to move.” Instead, Carr recommends:
- Narrow your top options, including leasing, purchasing and developing.
- Negotiate on your top options simultaneously on a non-binding basis.
- Once you have best and final terms from two to four properties, make an informed decision.
Even if that option is to stay in your current space, taking the time to understand the market, look at other properties and negotiate with other landlords will provide “more leverage and a stronger posture” with your current landlord, which should yield a better deal overall. In some cases, it may help to have professional representation in that process, which can signal to landlords “that they’re going to have to compete for your business,” Carr said.