Leasing Medical Office Buildings (MOBs)


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The healthcare industry and healthcare real estate have changed dramatically in the past several years. Healthcare reform, the recession, lower reimbursements and other issues continue to drive changes. Almost every aspect of Medical Office Building (MOB) properties is unique, so a brief overview of key information is presented below.

Ownership

  • On campus MOBs may be owned by the hospital, an owner/developer, or REIT. The later almost always involve a ground lease. Management may be assigned to a hospital facilities group or to a third party leasing/management team.
  • Off campus MOBs may be owned by hospitals, medical practitioners occupying the building, or investors including medical office REITS. Specialty buildings may be self-managed but when many assets are involved; medical providers may consolidate lease administration to a third party manager.

Leasing Issues

  • Less opportunity for frequent renewals and re-leasing as medical tenants do not relocate as often as office tenants
  • Must manage costs effectively as most leases are NNN and buildings compete on operating expenses and TI dollars being offered as well as lease term
  • Hospitals control effective use restrictions in buildings on their campus and the leasing team must work with the hospital to gain approval of tenants. Increasingly, hospitals employ physicians on a direct basis so the leasing team negotiates with the hospital and not the physician for lease space in the building. If the hospital owns space, the leasing team must be aware of Stark laws and manage lease pricing accordingly.
  • Fewer buildings to lease, fewer prospects, and small space (less than 10,000 sq ft) may mean that brokers have little incentive, as the small market and commissions do not compete with larger office building leases

Tenant Profile

  • On campus MOB rents are generally greater and tenant profile may include more medical specialists and physicians directly affiliated with the hospital, large group practices, medical corporations, pharmacies, and non-medical uses. Increasingly, higher acuity care uses such as surgery centers, radiation vaults, imaging centers, etc. have moved to MOBs to save costs.
  • MOBs located in neighborhoods may be smaller, have lower rents, and are generally occupied by primary care physicians, dentists, and non-physician tenants
  • In response to the new healthcare laws, many hospitals are building small surgical centers and freestanding emergency departments in areas away from larger hospitals

Attracting Tenants

  • Develop relationships with hospital administration including the physician relations team and keep them informed of space available in the property. Ground lease language for on campus buildings typically restricts the landlord from leasing to tenants without hospital approval.
  • Advertise in medical journals such as the American Medical Association journal
  • Attend medical conventions and trade shows
  • Maintain an active website listing vacant space
  • Develop strategic partnerships with large hospital systems representing the system in multiple transaction

Maintenance and Facility Management

  • MOB tenants tend to have high service expectations. Additionally, standards and regulations in effect at the hospital carry over to the MOB when hospital services are relocated to the MOB. Must be aware of JAYCO standards related to all building systems and management team must be more sophisticated in its approach to documentation of required maintenance.
  • Janitorial standards are higher due to use and type of facility and may range from general office cleaning for administrative areas to terminal clean in surgical centers or transplant areas. Cost for janitorial is greater than general office and strict standards must be followed in cleaning and medical waste removal.
  • Experienced medical office space planners will address ADA compliance and understand the additional requirements for engineering and health standards associated with planning and building many of today’s specialty medical spaces such as surgery centers

Download a copy of this Leasing Medical Office Buildings (MOBs) Handout.