By Ken Jorgenson, CARR Healthcare Realty
For most health care practices, real estate is the second highest expense behind payroll. The difference between a properly or poorly negotiated transaction can benefit or cost a practice tens to hundreds of thousands of dollars over a 10-year period. Additionally, you typically get only one opportunity every five to 10 years to take advantage of a new negotiation. With this much at stake, every transaction is paramount to maximizing profitability. Being educated on commercial real estate fundamentals can increase the potential to make your practice a success. The following are key considerations to understand:
Square Footage Needs
There are many property considerations to evaluate when choosing an office space for your practice. One of the most important considerations and first question to be asked is: What size space are you looking for?
Choosing the proper square footage for your new office space is a balancing act between size and money. You need to choose between how much space you need right now and how much space you will need in the future, say in five years from now or as you grow your practice. You also need to understand the cost of what you can afford now compared to what you can afford in the future.
If you play it too safe, you can end up limiting your upside and ability to grow your practice. On the other hand, if you acquire too much space, you can dramatically hurt your profitability in your first few years.
In an ideal scenario, you can find a space that gives you a healthy amount of room to grow, but also allows you to successfully manage your budget and profitability both at the beginning of the lease and through the completion of the term. Your goal is to be profitable as soon as possible, but not to the detriment of future profitability, which comes through growth.
Each real estate location and market also impacts the size you can afford. The real estate market in San Francisco, Calif. is completely different than the real estate market in Omaha, Neb. or even Denver, Colo. The more competitive the market and current economy is, the more limited your choices will most likely be.
If you are borrowing money from a lender, they may require your total monthly rent to be below a specific amount during the first few years of the lease or set a cap on the average monthly mortgage payment if you are purchasing. The specific amount of money these numbers are typically based upon is derived from the lender’s underwriting guidelines and are aimed at keeping the monthly payments to a manageable amount, especially in the first few years.
The best way to understand how to choose between the ideal amount of space and budget, is to work with several partners who can each help you balance the two decisions. A lender will tell you what your maximum budget is. An architect or general contractor can help you determine how much you can build inside the space and at what cost. An experienced health care real estate agent can make sure you evaluate your top options that best fit your requirements, and then how each option compares to the others — both financially and through other important business considerations.
Selecting the proper square footage for your new office is an extremely important decision that you should make based upon market knowledge, current and future needs, and most importantly — budget.
Another vital property consideration for your office space is parking, for both your staff and your patients. When evaluating the parking needs for your patients, you have three groups to consider: patients who are coming to your office, patients who are already inside your office and patients who are leaving your office.
Depending on your schedule, there can be a high demand on the parking allotted to your space due to other tenants sharing your parking lot. While most medical office buildings and retail centers have a higher parking ratio for this reason, its important to make sure the property you are considering has ample parking both for your needs and the needs of other tenants that ebb and flow throughout the day.
While some landlords allow specific tenants to have a few reserved parking spaces, the majority of landlords do not grant exclusive parking spaces for patients. This means it’s important to ensure the locations you are considering can accommodate your current practice and future growth.
Visibility and Signage
Two of the most requested property considerations for new offices are strong visibility and exterior signage, either on the building itself or on a prominent monument sign in front of the building. These requests also are two of the most important items for nearly every national retail tenant. Large, national retailers count on the visibility and signage of their locations for marketing, brand awareness and most importantly, driving business to their stores.
Since the early 2000s, more and more health care providers have been seeking the same benefits that come from the positive exposure of both visibility and signage. It helps patients find your location and provides built-in marketing and brand awareness.
That being said, visibility and signage usually come with a higher price tag. In the majority of commercial real estate markets, landlords charge a premium for high visibility properties, spaces and signage. Landlords understand the value that visibility and signage offer, and properties that benefit from them typically are priced higher than similar properties that don’t have the same exposure.
Even government agencies, such as real estate assessors, recognize this when valuing properties. You can expect the majority of properties that offer high visibility and signage to be assessed with higher property taxes and as a result, will have higher operating expenses. It’s important to weigh the increase in your real estate evaluation and, if applicable, evaluate if the increase in monthly rent or mortgage will benefit your practice proportionately. There are many times that the exposure and signage is worth the added expense. An alternative and potentially stronger position could be to select a property that would save you more money on a monthly basis and use the savings to invest in a targeted marketing strategy.
Last, there are some specific types of practices that are 100% driven by referrals of other practitioners, where little benefit is obtained or needed from either visibility or signage. If the vast majority of your new patients are coming at the recommendation of a referring doctor, paying the premium for signage and visibility may not be worth it.
As with most financial decisions, a detailed evaluation provided by your agent should help you weigh the difference between cost and benefit.
Another main consideration alongside visibility and signage is access to your office. In other words, if a patient is driving to your office, what is the closest major intersection to your property? Where do you turn to get into your property’s parking lot? Does the property have great visibility but challenging or poor access? That problem can occur when the primary access point to a property is a location you need to turn into before you can actually see the building. When that happens, a new patient drives by the building and sees your office, but then has to pull a U-turn or make multiple turns to get back to the main access point of your location. Thankfully, the majority of new patients will rely upon GPS and mapping software on their phone to find your office the first time. However, the easier the access is for the patient to get to your building and the more recognizable the major intersections or known landmarks are to your property, the more ideal the patient’s experience is in finding your office. Thus, the more likely patients or referral practices will recommend you.
Anchor Tenants and Complimentary Practices
The next property consideration we are going to discuss is the impact of what are commonly referred to as anchor tenants as well as complimentary health care providers. This often is an overlooked but important consideration when it comes to commercial real estate fundamentals.
Anchor tenants are most commonly found in large shopping centers and areas that are located nearby your office space or in the same building or complex. Anchors often are identified as grocery stores, warehouse clubs, depots, large retailers and other prominent tenants that drive a significant amount of foot traffic into stores and shopping areas. Anchor tenants attract other businesses and retailers who desire to be located nearby for the same reasons. Overall, anchor tenants increase the number of customers or clients in a specific area.
Anchor tenants also can be smaller in size, as long as they drive significant traffic to a property. For instance, a prominent coffee shop might bring several hundred visitors to a property in a single day. Other restaurants or retailers with a smaller size also may be able to attract a noteworthy amount of potential new patients.
A health care practice within an office building, medical office building or on a hospital campus that has complimentary practices located in the same building or campus can have a huge impact on the success of your practice. For instance, if you are pediatric dentist, being in a building with a pediatric physician could have a huge impact on the number of new patients you see. Many health care providers will seek out buildings or campuses that allow themselves to be surrounded by other providers who are both complimentary and can provide tangible opportunities for referrals.
In summary, there are pros and cons to nearly every property, and each consideration needs to be weighed. The space you are the most excited about might be the most expensive or above your budget. The center that has the most traffic and visitors per day might have the most challenging parking if you are competing for parking against other busy tenants. A property that is priced the most competitively might not offer the visibility and signage you would ideally like.
It’s incredibly important to truly understand all the property options that meet your requirements. To do this, you should hire professional representation and make sure you are evaluating and negotiating with multiple owners whenever possible. This allows you to compare multiple spaces, buildings, landlords and offers against the other options, so you are able to make the best decision possible. Real estate will make a major impact on your practice’s profitability. Make the most of every opportunity.
CARR Healthcare is the nation’s leading provider of commercial real estate services for health care tenants and buyers. Every year, thousands of health care practices trust CARR to achieve the most favorable terms on their lease and purchase negotiations. CARR’s team of experts assist with startups, lease renewals, expansions, relocations, additional offices, purchases and practice transitions. Health care practices choose CARR to save them a substantial amount of time and money, while ensuring their interests are always first. Visit CARR.US to find an expert agent representing health care practices in your area.