Analyzing value of medical office space?

[Jennifer Nguyen]

There is a medical office unit for sale in my area. How do I analyze whether or not it is a good deal? Since it is a commercial property, would I look at comps or cap rate? Is it similar to analyzing a multi unit or apartment? What are some things I should evaluate?

[Jeff Kehl]

@Jennifer Nguyen I've looked at several commercial appraisals recently and although they are more voluminous they sort of take the same tact as a residential appraisal. They look at the income approach and cap rate and they also look at comps and what the market is like. And one listed the replacement cost as well so they do cover the value from the same three angles that residential appraisals do but they looked at it much closer. The last one I looked at was 114 pages.

So what I took from that is to look at it from several different angles as in-depth as possible.

The appraisal I was looking at was for a 10,000 square foot office property. They looked at all sales of office properties in the area and they sold anywhere from $60-120/per square foot. So this property should be worth $600k to $1.2 million right?

Well, though, is it occupied and what kind of income is or could it be generating? There is a 13,000 square foot building in my town for sale right now for $99k. A bargain right? It is vacant and generates $0 in rental income so it is worthless from the income/cap rate approach. It is in a bad area, where no one wants their business and is old and probably would need $200-500k in work to be habitable. So although they are asking $99k it is probably worthless or worse.

A lot of this is like residential it just requires more in-depth thought and research.

So for your medical office I would start with these things and do a lot of research. I would definitely look at comp sales of similar office properties. And also what would it cost you to rebuild a similar property? 

If it is currently occupied use the income approach and a market cap rate. But also look very closely at the lease. You are buying that as much as you are the building. How much time is left on it? Are there extensions? Are there rent escalations? Who pays for what expenses? Is it a single tenant or multiple?

If it is vacant you need to look very carefully at the market. Is the property set up for a psychiatrist or a dentist? Is that the type of tenant you will go after or will you target another type? Talk to brokers and listing agents to see what kind of demand there is for that type of space. If you are switching tenant types what kind of Tenant Improvement costs are you looking at to get it ready for them?

Pretend you are a dentist or whatever type of tenant. What sort of options are available to them? Look at all the options available to them on the market, off the market and building new. Is this space competitive with them?