Medical office condos take a hit from real estate slide

The niche market is still doing better than other sectors, experts say, and some developers are adapting projects to go condo.

By Victoria Stagg Elliott — Posted Feb. 15, 2010

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Physicians who bought medical office condos during the real estate boom should sit tight. And those looking to buy this type of property definitely need to exercise due diligence in verifying the viability of a proposed project or even an established building.

The advice comes from those who work in this corner of real estate.

"If you don't have to sell, you can wait a little longer," said Neil Shapiro, chair of the health care practice group at the law firm Herrick, Feinstein in New York. "Everybody is a lot more cautious than they were a couple years ago."

Medical office condos first emerged in the 1970s but became more popular in some areas of the country, such as Arizona, Florida and Nevada, in the past decade. Anecdotal and statistical evidence, however, suggests that the value of these kinds of properties has gone down in the subsequent real estate bust, although not as much as that of general office condos and other commercial real estate.

Medical condos are "a small sector, and I think the medical field in general is holding up very well," said Darren Lizzack, associate vice president at NAI James E. Hanson Inc. in New Jersey. "And doctors are probably in better shape to qualify for financing. Their default rate is significantly lower than a traditional office user."

According to data from CoStar Group Inc. in Bethesda, Md., there were 13,710,448 square feet of medical office condo space, in 4,074 buildings, available for lease or sale across the country in the fourth quarter of 2008. The numbers went up to 15,952,799 square feet in 4,550 buildings in the fourth quarter of 2009. This suggests there is much more space on the market available, which accounts for the price declines being seen.

For example, Kenneth Weston, president and CEO of Kenneth Weston & Associates Inc. in Miami, has noted that in his region, the values of medical office condos have declined about 25% over the last year.

"The whole medical office market is taking a little bit of a hit," said Weston, a real estate broker and consultant who specializes in medical property. "With health care reform, there are many physicians and other health care providers who are waiting to see how this is going to possibly be resolved."

His data suggest that the value of other commercial real estate in his region declined about 50% over the last year, although he expects these numbers to turn around eventually.

"Everything in real estate is cyclical," Weston said. "I see a strong future for medical real estate, including medical condos."

Any ownership helps build equity.

"I love it. I'm still very satisfied. It works for me, and the likelihood of me moving is not that great," said Stephen Kundell, MD, a pediatrician who owns his 1,500-square-foot office in a Thousand Oaks, Calif., medical office condo complex.

But buyers should still beware. Good deals abound, experts note, but with capital hard to access, some developers may not be able to turn an empty lot into actual building in a timely manner, or at all.

"Health care professionals do not want to look at a project unless it is totally finished," Weston said. "And you want to look at the stability of the developer that built it and the strength of the condo association. It is a buyer-beware situation when it comes to these types of purchases. You have to do your homework."

Physicians also are advised to assess future needs carefully. The cost of owning a medical office condo can be comparable with leasing, but expanding or contracting will be more difficult with a space that has to be bought or sold. Those looking to buy should plan to stay in the space for at least five years.

"If they plan to be there a shorter period of time, they are probably better off leasing," Weston said.

Another key consideration is whether a medical office condo truly meets the unique needs of the health care setting, such as specially designed plumbing, cabinetry and elevators, as well as additional parking.

Although the medical office condo market has softened, its prospects are perhaps better than for other commercial real estate. In response, some developers are shifting focus to serve this sector but may not have the necessary know-how, Weston noted. Before this downturn, he got few calls from developers seeking his expertise to turn regular offices into medical ones. Now, he gets about 10 a week.

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