In today’s market, there is a lot of uncertainty in all sectors of real estate and now it has hit the medical market too. It used to be that medical office was almost immune from what the market was doing, but no more.

As physician practices see declining reimbursements from the government and insurance companies and the costs of doing business climb, there are a lot of tough choices to be made. This affects the real estate market with physicians looking much more closely at expenses including rent, operating expenses, annual rental increases, tenant improvement allowances, and free rent. A physician must look at all of the expense variables for every single year of the term to make sure that he/she can afford the total cost with the obvious unknown of influx of income.

As we see more landlords change from full service medical leases to triple net leases, physicians need to understand the differences because, traditionally, medical leases have been full service. The rent numbers appear a lot lower to entice the tenants, but when you gross up the base rental rate and include $7 to $8 per square foot for operating expenses, it can really pinch the practice. This now adds maintaining their own space and paying additional bills to a physician or office manager’s already full plate.

We are going to begin seeing more physicians looking at second generation spaces to save on improvement costs and rent rather than going into a new building. Capital is going to be tight all around and hospitals and physicians are going to be looking for bargains. Long term leases are going to be much harder to sign because, in the current economy and the talk of health care reform, no one knows what things will be like in the medical world 7 to 10 years from now, let alone 3 to 5 years.

Contact NAI Southern Real Estate or Mike Wiles at mwiles@srenc.com