Medical Office in One Page
Medical office buildings (MOB) represent a defensive, necessity-based real estate sector. Healthcare is non-discretionary, driving stable demand even during economic downturns.
Why Medical Office?
- Recession-resistant: Healthcare demand is non-discretionary
- Aging demographics: Baby boomer tailwind driving utilization
- Sticky tenants: High switching costs due to patient relationships and specialized buildouts
- Long-term leases: Typically 5-10+ years with credit-backed guarantees
Key Challenges
- High TI costs: Medical buildouts are expensive and specialized
- Regulatory complexity: HIPAA, ADA, infection control, radiation shielding
- Physician consolidation: Independent practices being acquired by health systems
- Reimbursement risk: Medicare/Medicaid payment changes can impact tenant viability
On-Campus vs Off-Campus MOB
On-Campus MOB
Located on hospital campus or directly adjacent. Typically owned or master-leased by the health system.
Advantages:
- + Strong health system credit
- + Physician referral network
- + Shared services and parking
- + Lower tenant rollover risk
Disadvantages:
- - Lower cap rates (premium pricing)
- - Monoline risk if health system struggles
- - Less flexibility in tenant mix
Off-Campus MOB
Located in commercial areas, suburban markets, or standalone. Multi-tenant with independent physician practices or specialty groups.
Advantages:
- + Higher cap rates
- + Tenant diversification
- + Flexible tenant mix (retail pharmacy, PT, imaging)
Disadvantages:
- - Higher rollover risk
- - Weaker tenant credit (individual physician practices)
- - Higher TI costs on re-tenanting
- - More vulnerable to consolidation trends
Lease Structures and Tenant Improvements
Typical Lease Structure
Most MOB leases are NNN or modified gross with CAM pass-throughs:
- Base rent: $20-$35/SF/year (varies widely by market and quality)
- Lease term: 5-10 years with renewal options
- CAM, taxes, insurance: Pro-rata share or direct pass-through
- Escalations: 2-3% annual or CPI-based
Tenant Improvement Costs (The Big Number)
Medical buildouts are significantly more expensive than standard office:
- Basic medical office: $50-$100/SF (exam rooms, HVAC, plumbing)
- Specialty practices: $100-$200/SF (surgery centers, imaging, dental)
- Highly specialized: $200+/SF (radiation oncology, cath lab, dialysis)
Critical: High TI costs mean re-tenanting is expensive. Tenant retention is key to returns. Underwrite long vacancy periods and full TI replacement on rollover.
Personal Guarantees and Credit Enhancement
Independent physician practices often have weak entity-level credit:
- Personal guarantees: Physicians personally guarantee lease (common for smaller groups)
- Health system affiliations: Some practices have health system backing or master leases
- Revenue verification: Request financial statements and verification of insurance reimbursement contracts
Underwriting Medical Office Deals
Tenant Credit and Consolidation Risk
The healthcare landscape is consolidating. Independent practices are being acquired by health systems and private equity-backed groups.
Questions to ask:
- Is the tenant affiliated with a health system? If yes, is there a guarantee?
- Is the practice independent or part of a larger group?
- What percentage of revenue comes from Medicare/Medicaid vs commercial insurance?
- Has the practice discussed selling to a health system or PE group?
Location: Proximity to Hospitals and Population Centers
Medical office location is driven by:
- Hospital proximity: On-campus or within 1-2 miles drives referrals and convenience
- Demographics: Aging population, income levels, insurance coverage rates
- Access and visibility: Easy access, parking, signage for patients
- Competing MOBs: Oversupply can compress rents and occupancy
MOB Underwriting Checklist
- ✓ Verify tenant credit and health system affiliations
- ✓ Review lease guarantees (personal or corporate)
- ✓ Estimate TI costs for re-tenanting (use high end of range)
- ✓ Model rollover scenarios with 6-12 month downtime
- ✓ Check parking ratios (4-5 spaces per 1,000 SF minimum)
- ✓ Confirm compliance with ADA, HIPAA, and local healthcare codes
- ✓ Assess proximity to hospital and population demographics
Use our investment calculator to model DSCR and cash flow with heavy TI assumptions.
Due Diligence Checklist
Lease and Tenant Review
- All executed leases, amendments, and tenant estoppels
- Tenant financial statements (if available)
- Personal guarantee documentation
- Health system affiliation agreements (if applicable)
- Rent roll and lease expiration schedule
Physical and Compliance
- ADA compliance (ramps, restrooms, exam rooms)
- HVAC systems (medical-grade air filtration and infection control)
- Plumbing and medical gas lines (if applicable)
- Radiation shielding and imaging equipment (if radiology tenants)
- Fire suppression and life safety systems
- Parking sufficiency and ADA compliance
Market and Healthcare Trends
- Hospital system financial health and market position
- Physician consolidation trends in the market
- MOB vacancy rates and rental comps
- Demographics: age distribution, insurance coverage, income
Common Mistakes to Avoid
Underestimating TI Costs
Medical TIs are 2-4x standard office. If you underwrite $50/SF and reality is $150/SF, your returns evaporate.
Weak Tenant Credit Without Guarantees
A two-physician practice with no health system backing is not credit-worthy. Get personal guarantees and verify financials.
Ignoring Consolidation Trends
Independent practices are being acquired. If your tenant sells to a health system that has its own buildings, you may lose them at renewal.
Inadequate Parking
Medical office requires higher parking ratios than standard office (4-5 spaces per 1,000 SF). Underparked = tenant and leasing problems.
Related Resources
- Investment Calculator →
Model TI-heavy scenarios and rollover downside
- DSCR vs Debt Yield vs LTV: The Underwriting Triangle →
Understand the three metrics lenders care about
- Tools & Resources →
Curated platforms for data, market analysis, and underwriting