CREJ

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COLORADO REAL ESTATE JOURNAL

— December 7-December 20, 2016

t’s safe to say that all market

sectors have improved sig-

nificantly over the past two to

three years in Colorado. Retail,

multifamily, industrial, office/

medical office and single-family

homes are all sectors along the

Front Range that have performed a

lot better than in previous years.

The surge for the sale of medical

office buildings is pretty straightfor-

ward. Buyers are taking advantage

of low interest rates, high occu-

pancies of MOBs and an improved

economy. Many of the buyers are

completing 1031 exchanges. The

downside to this, however, is that

buyers are often investing in sub-

markets that they know very little

about. They may be experts in retail,

office and industrial, but they’ve

never owned medical buildings

before. Medical buildings require

more management than a typical

office building and there are many

unique characteristics that general

office buildings don’t have.

It is imperative that these buyers

do their due diligence: 1) knowing

what other buildings have sold and

are being built in that submarket;

2) visiting the property in person to

evaluate the condition of the asset.

All too often, we talk to buyers who

will send out a representative who

doesn’t do a thorough evaluation;

and 3) unless you have an agent

representing your fiduciary inter-

ests, you’re most likely buying the

property from the seller or an agent

representing the seller’s interest.

This can put the

buyer at a disad-

vantage in regard

to the purchase

price and cap rate.

The listing agents

typically have very

little experience

leasing medical

office space. It is

therefore impera-

tive that the buyer

understands the

submarket and

the strength of

the medical/den-

tal professionals within the build-

ing. The buyer should analyze its

own investment report and not

completely rely on what the listing

agents say. With cap rates so low,

and many of the buildings lever-

aged, there is not a lot of room for

additional vacancy to make a profit

after the building is purchased.

These buildings are typically being

sold at 85 to 95 percent occupancy.

If the building is 75 percent lever-

aged, there is little room for vacan-

cy before the building is experienc-

ing a negative cash flow.

What entices buyers into medi-

cal/dental office buildings are the

long-term leases and stability of the

tenants. Medicine has changed sig-

nificantly over the years due to the

Affordable Care Act. This will con-

tinue to transform with high-end

specialists moving closer to hospi-

tals, secondary dental and medical

groups moving to off-campus build-

ings and larger

national and pri-

vate equity groups

continuing to buy

practices that ben-

efit their market

plan. Please keep

in mind if a tenant

within the build-

ing you just pur-

chased is bought

by a larger entity,

then there is good

probability of that

tenant moving to

a building where the private equity

group has other like-kind tenants.

Buyers beware. Don’t fall in love

with the cap rate or assume all of

the tenants in the building you pur-

chase will stay there. Commercial

real estate tenants always will have

the option to move, join another

practice or form an investment

partnership and build their own

building. However, if you take your

time and perform your due dili-

gence, you will have a great expe-

rience in owning a medical office

building.

Buyers, do your due diligence with medical office

Ted Link

Broker/owner,

Cascade

Commercial Group,

Colorado Springs

David Schroeder

Broker associate,

Cascade

Commercial Group,

Colorado Springs

Buyers beware. Don’t fall in love

with the cap rate or assume all of

the tenants in the building you

purchase will stay there. Commercial

real estate tenants always will have the

option to move, join another practice

or form an investment partnership and

build their own building.

Health Care & Senior Housing Spotlight