By Ben Reinberg
It’s no secret that physicians are well compensated (justly) for their efforts. But what is the best strategy to put that money to work? To build up personal wealth, many doctors have turned to an investment vehicle that is very familiar – medical real estate.
Investing in real estate is a common strategy for high-income individuals, typically serving as a hedge against Wall Street. While stocks offer better flexibility and liquidity, real estate is more resilient to fluctuations in the market and generally offers more tax breaks. It also provides a passive income stream while, typically, appreciating in value over the years.
But even hands-off investments take some know-how. Fortunately, physicians have a leg up on the competition when it comes to one of the hottest property sectors – healthcare real estate – as many have owned their own clinics, have intimate knowledge of how they operate, and understand the various demographic and locational factors that drive demand for services.
According to recent research from Colliers, the medical office sector not only withstood the barrages of the pandemic, it surged ahead. For example, throughout 2021, the vacancy rate among medical office buildings fell slightly to 8.3%, while general office buildings saw their vacancies increase to 14.8% during the same period.
As most physicians are likely aware, the sector had other favorable metrics as well. Between 2020 and 2021, rents at healthcare properties rose 1.7% to a record high of $22.61 per square foot, according to Colliers. Sales of these properties increased from $11.9 billion to $17.4 billion year-over-year – another record for the sector.
With demand outstripping supply, the medical office sector is expected to remain on its upward trajectory for the foreseeable future. One compounding factor is the approximately 10,000 baby boomers who turn 65 each day, an aging population that is driving up the need for healthcare services across the U.S.
The need for medical real estate will also expand due to health spending. According to data from the Centers for Medicare & Medicaid Services (CMS), national healthcare spending spiked during 2020 in response to COVID-19, but dropped below pre-pandemic levels in 2021. CMS projects that healthcare spending will grow by a steady 5.1% each year on average for the remainder of the 2020s.
The Medtail Trend Continues
For several years now, healthcare providers have been emigrating from hospital campuses, seeking lower rents and improved patient access in established commercial and residential neighborhoods. As a result, medical tenants now occupy many spaces that historically housed retail uses.
Typically, healthcare providers gravitate to single-tenant, single-story properties that are easier to manage and that offer curbside access for patients and employees. In most of these cases, the providers sign a net lease for their space. While many physicians may be familiar with net leases from the tenant side of the equation, they may not be aware of how lucrative net-leased healthcare can be for investors.
Net leases allow landlords to shift a property’s financial obligations to the tenant who, depending on the structure of the lease, pay for property taxes, insurance premiums and/or maintenance costs, in addition to rent. The result is a relatively passive investment that is also very stable due to the high creditworthiness of medical providers, particularly as more independent practices become part of larger health systems or corporations.
With retail centers in such dire straits due to the pandemic, it would be easy to assume that medtail supply is expansive and landlords have no issues backfilling their properties with healthcare providers. However, not all spaces are conducive to medical use and there remains a high barrier to entry in most communities due to required licensing. Moreover, once a healthcare provider does select a space, they usually have to make costly upgrades to suit their needs, diminishing the chance of them relocating at the end of their lease. As a result, net-leased healthcare spaces usually command 10- to 15-year terms, making them an excellent investment over the long haul.
Two Approaches to Investing in the Familiar
Since they work in the industry, physicians know just how dynamic the medical field is and how demand for services is expected to increase in the years ahead. It’s only natural they would decide to put their personal capital into this space.
There are two ways for doctors to invest in healthcare real estate: actively or passively. An active investor is essentially a landlord and will have to put some degree of sweat equity into his or her portfolio of properties. This could vary from hands-on participation to hiring a third-party property manager to oversee day-to-day tasks.
While active investing does provide greater control, it may be too much of a distraction for most doctors, especially those who are still practicing. The passive approach involves collaborating with an investment manager who is experienced and knowledgeable about healthcare real estate. Those doctors who can find a trusted partner to manage their investment can focus on what they do best – providing care to their patients and, eventually, enjoying retirement.
Whichever path is chosen, medical real estate is a natural way for physicians to grow wealth – in all stages of their career. And with the prognosis for these assets as favorable as ever, there’s no better time than now to invest.
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About the Author
Ben Reinberg is Chief Executive Officer of Alliance Consolidated Group of Companies. A respected authority on commercial real estate acquisition, investment, development and transaction structuring, he has authored and published numerous articles pertaining to the trade. Ben brings value to the deal process through his ability to build trust quickly, raise equity efficiently, solve problems and bridge the gap between buyers and sellers. He founded Alliance in 1995 and the firm now specializes in net-lease healthcare real estate investment.