Many medical practices are going condo

By the time Stephen Kundell, MD, learned of a real estate option geared toward doctors in private practice, he already had paid out more than $250,000 in rent and spent thousands more in upgrades to his office space that netted nothing in return.

But Dr. Kundell didn't want to buy a building. So the pediatrician from Thousand Oaks, Calif., did what physicians around the country in a similar situation are doing -- he invested in a medical condominium.

In general, office condominiums aren't a new concept. But a few years ago, when rent prices saw a dramatic increase and property costs soared out of reach for many physicians, more of them started to see the investment potential of office condos. It was an opportunity to earn equity, manage your own space, share construction costs with others and possibly qualify for small business loans. And buying a condo was a lot less expensive than buying a building.

Now medical office condos are being constructed in most major markets around the country. Even though the residential real estate market in most of the country has flatlined or declined in recent months, construction of medical office condos hasn't slowed, real estate experts say.

The medical condo market is so new that no one has researched it specifically. But according to Bob Bach, a researcher with the national real estate firm of Grub and Ellis, the office condo market in general is booming. Plus, he said, the success of new, larger medical facilities, such as hospitals, is partly reliant on neighboring medical condos. While many of those nearby condos were needed initially to house specialized technologies, Bach said, doctors found that they also could benefit by setting up their practices close to a hospital.

Developers now are seeing the potential even in areas absent a traditional medical campus.

Todd Shaw, principal and managing director of Del Mar Equity, said he decided to develop a medical condo project after speaking with several doctors who wanted to work close to home. Del Mar, an El Segundo, Calif.-based company experienced in luxury home construction, announced plans in November for a medical complex in Manhattan Beach, Calif.

Shaw said this would be the first new medical building in that city in more than 10 years. Meanwhile, about five opened up about nine miles away in Torrance, where the closest hospital is located. Two of Del Mar's owners live in the beach community and wanted to fill a need there, Shaw said.

If Moshe Silagi's success is any indication, Del Mar won't have a problem selling units. Silagi, principal of Silagi Development, which developed the Regency Medical Plaza where Dr. Kundell is located, said the interest in his project was so high that the 14 units in the 64,000-square-foot building sold out while it was under construction. The Regency project was the first medical complex for Silagi.

Several large-scale projects recently have been announced near retirement communities in Arizona and Florida. And while smaller-scale projects can be found in nearly every state, Silagi doesn't expect there to be a saturation. Because of their specialized nature, he said, he doesn't expect there to be an over-building of medical condos like many markets experienced with residential condos.

While the national average price of office condominiums -- $179 per square foot, says 2005 research conducted by Grubb and Ellis -- is generally quoted for shell only, many developers offer an allowance for the interior. In high-priced California, Shaw said his condos start at $1,000 to $1,200 per square foot and will include some interior work for the price and possibly an allowance for soft interior work, such as cabinetry.

While Dr. Kundell expects to stay at his condo a long time, he suggested that other physicians should be aware of potential pitfalls.

Before deciding to invest, you need to determine your goals for up to 10 years and decide if you plan to grow your practice, he said. When you buy a condo, "you commit yourself to the space available," Dr. Kundell said. "You're stuck with where you start."

According to Grubb and Ellis' research, condo office spaces are generally smaller than leased space. In the first three quarters of 2005, leased offices were an average of 9,800 square feet, while office condos were generally less than 5,000 square feet. For a physician requiring more that 5,000 square feet, a condo is probably not the best option, experts say.