Medical Office Investing

Medical practices typically invest significant capital in specialized build-out, including plumbing for exam rooms, dedicated electrical circuits for imaging or diagnostic equipment, and enhanced HVAC for infection control, which makes relocating expensive and disruptive to patient continuity of care. This higher switching cost, combined with many practices building a local patient base tied to their specific location, tends to result in longer average tenancy than typical general office space.

For medical office, tenant strength is often assessed through the size and financial standing of the practice or health system, whether the tenant is affiliated with or guaranteed by a larger hospital system, the practice's payer mix and reimbursement stability, and the specific specialty, since some specialties are more resilient to reimbursement changes than others. A lease guaranteed by a large regional health system generally carries lower credit risk than a lease with a small independent practice.

Yes, medical office buildings held for investment or business use are real property and qualify as like-kind replacement property for virtually any other investment real estate. This includes buildings leased entirely to healthcare tenants as well as mixed-use buildings with a combination of medical and general office tenants, though the underwriting approach differs based on the specific tenant mix.

Because many healthcare tenants derive a significant portion of revenue from insurance and government reimbursement programs, changes to reimbursement rates or healthcare policy can affect a practice's financial stability and, in turn, its ability to sustain lease payments over time. This is a risk factor somewhat unique to medical tenants compared to standard commercial tenants and should be considered alongside more traditional real estate risk factors during underwriting.

Demand is concentrated near major hospital campuses and in established medical corridors, including areas near downtown Seattle hospital systems and suburban corridors near Bellevue and Renton, where population growth has supported additional outpatient and specialty practice space. Specific building performance depends heavily on proximity to a hospital or health system anchor and the depth of the local patient population the practice serves.