The Clinic That Would Lose Patients by Moving Two Miles
Medical office buildings house outpatient clinics, and their appeal to landlords is that the tenants are unusually reluctant to leave. Fit out cost, patient habit, and referral patterns all anchor the practice in place.
Why the Tenants Stay
A medical practice occupying a suite has invested in fit out that does not travel: examination rooms, plumbing for sinks in every room, lead shielding for imaging, specialist power and data, and sometimes fixed equipment.
It has also accumulated something less tangible. Patients know where the practice is. Referring physicians in the same building send patients down the corridor. A practice that moves several miles loses a share of both.
The result is retention rates that exceed general office substantially, with tenants frequently occupying the same suite for decades and renewing rather than relocating.
| Factor | Effect on Retention |
|---|---|
| Specialised fit out | Expensive to replicate |
| Patient familiarity with location | Moving loses patients |
| Referral relationships in the building | Proximity generates volume |
| Regulatory approvals tied to the site | Relicensing a new location takes time |
The high retention is not a sign that landlords are generous. It is a measure of how expensive leaving would be, which is the same thing that makes any tenant sticky and is unusually strong here.
On Campus and Off Campus
The sector divides on a distinction that determines much of the value.
On campus buildings sit on or adjacent to a hospital site. Proximity matters clinically, since physicians admitting patients or performing procedures want to be near the hospital, and it matters commercially, since the hospital controls the land and frequently the ground lease.
Off campus buildings sit in suburban locations chosen for patient convenience. The shift of care out of hospitals into outpatient settings has favoured these, and they carry no ground lease relationship.
On campus assets command a premium for the proximity and carry a specific risk: the ground lease is with the hospital, which is also the largest tenant or the credit behind the largest tenants, so the landlord has concentrated exposure to one institution in several ways at once.
The Credit Shift
The most consequential change in the sector over two decades has been who signs the lease.
Historically tenants were independent physician practices, meaning small partnerships whose credit was the personal covenant of a handful of doctors.
As hospital systems acquired physician practices, an increasing share of leases became obligations of large health systems with public credit ratings.
That is generally favourable for a landlord: a system covenant is stronger than a small partnership, and lease terms tend to be longer.
It also concentrates risk. A landlord whose building is substantially leased to one health system has a single credit exposure, and if that system consolidates operations it may vacate several suites simultaneously.
The Regulatory Complication
Leases in this sector operate under constraints that do not apply elsewhere.
Laws restricting financial relationships between hospitals and referring physicians mean that a lease between a hospital owned landlord and a physician tenant must be at fair market value, in writing, for a term of at least a year, and commercially reasonable regardless of referral volume.
A below market rent to a physician who refers patients to the hospital can be characterised as improper remuneration for referrals, with severe consequences.
The practical effect is that rent concessions, free rent, and tenant improvement allowances in these buildings require valuation support, and landlords maintain documentation that would be unnecessary in ordinary office leasing.
What the Demographics Support
The demand case is more durable than most property sectors, resting on two observable trends.
An ageing population consumes substantially more outpatient care per person, and the largest cohorts are moving into the age bands where utilisation rises sharply.
And care continues shifting from inpatient hospital settings to outpatient ones, driven by clinical advances, payment policy, and cost, which increases demand for exactly this space.
Those trends are slow and reasonably predictable, which is why the sector is regarded as defensive relative to office.
Where the Risk Actually Sits
Three items deserve attention in underwriting.
Reimbursement policy. Proposals to pay the same rate regardless of setting would reduce the revenue advantage a hospital owned outpatient site enjoys, which affects the economics of the tenant rather than the building.
Tenant concentration in a single health system, which converts a diversified rent roll into one credit.
Ground lease terms on campus assets, particularly remaining term and renewal rights, since a building on a shortening ground lease is a depreciating asset regardless of occupancy.
The Bottom Line
Medical office buildings retain tenants because leaving costs a practice its fit out, some of its patients, and its referral proximity, which produces occupancy and renewal rates that general office cannot match. The credit behind the leases has improved as health systems acquired practices and concentrated as a result. The demand drivers are demographic and structural rather than cyclical, which is the strongest argument for the sector and the reason it trades at yields well below other commercial property.