Editor’s note - 2023 was a banner year for Practice Real Estate Group and our clients. What can start-up doctors and practice owners expect in 2024? I asked our Texas market leaders and here’s what they had to say.
How is 2024 looking for healthcare entrepreneurs?
Leasing Retail
Here’s the reality: the retail real estate market, which applies to the majority of our clients, is 96 to 98% occupied, depending on where you are in Texas. It's tough. So if your goal is to be open by this time next year, you need to start searching today and have some flexibility. If you’re in the mindset, “I want to open as fast as possible,” you could settle on something that puts you in a really tough position down the line. Plan it out. Find the right area with your agent, then be willing to wait for an opportunity - not an availability.
To add an additional challenge, most of what's going to be available in high-growth markets is going to be proposed or under construction. It can be difficult to visualize or have the assurance that the project will be completed when expected. But when those projects hit the market, they lease quickly. If there’s a new development - even just a drawing and a sign - in your desired area, be willing to look at it with your agent. It could offer an opportunity that others may be slow to move on because it’s not turn-key.
Leasing or purchasing a Medical Office Building (MOB)
Any “true blue medical” user (OB/GYN, Cardiologist, etc) is going to be in a MOB, likely adjacent to a hospital. There are still vacancies and opportunities in that market. The lease rate is still high - 85% occupied - so you don’t want to wait forever.
Purchasing a building
Simply put, there’s not a lot of supply. Good medical building opportunities are few and far between. That’s not all bad news because now is likely not the right time to purchase your practice real estate.
But keep an eye out in the next eight to 14 months. Because one of two things are going to happen:
- Either interest rates are going to come down or
- We will hit the dip that everybody's been trying to predict since COVID happened and interest rates will come down.
In short, we are hearing that interest rates will likely come down. And even now, rates for doctors are on par with where they were 10 to 15 years ago. The special circumstances that forced them into the twos and threes shut the world down for a couple of months to a couple of years, depending on where you lived. The only time we’re likely going to see it happen again is if something catastrophic happens. And in that sense, I don’t want to see twos and threes in the future.
I do hear my clients get nervous about a seven or eight percent interest rate, wishing, for example, that it was a five or a six. But one thing to note here is that a change in one or two points on a loan is a few hundred dollars each month, not a few thousand. Generally speaking, those few hundred dollars are the least stressful thing about starting up your clinic or purchasing a building. If a few hundred dollars are the real reason why you’re not starting your search, it may not be the right time for you. Keep in mind that you can also refinance down the road.
To bring all of this together, if you're looking to own your real estate for your practice, today is not the day to buy. Over the next six to eight months, prepare to be in a position to put an offer in. My three tips are
- Save, save, save for the down payment.
- Start identifying areas or where you want to be, or if it's a second location,
- Call your real estate agent. Often, just driving by, it seems like everything is for lease. But what’s hard to show is that if a building is an opportunity, many investors will be competing for the deal. You need someone scouting for you.
Expanding to a second location
Don't take a secondary site - during this economic climate or any - just to get an office open. Try to prioritize the best site possible. It’s worth waiting another six months to get the right site, as opposed to just opening as soon as you can. If you want to genuinely be open ASAP, get with a banker and agent today to start your search. This has been true in past years, and I will continue to advise our clients this way in 2024. Do not open a second site out of a feeling of urgency - do it with a desire and plan for long-term success.
Regional Insights
Central Texas Market
“There are opportunities everywhere in Texas. I don't care how occupied it is. But you need to be willing to wait for the right opportunity in the right area. If you look at the growth in Central Texas alone, they say it's slowing down, but there still are over 100 people per day moving to Austin and surrounding communities. They need a place to shop, a place to live; they need everything. There's only going to be more development here in Central Texas over the next five to 10 years. While there might not be the exact opportunity that you want in Austin, in the specific market that you're looking in, call your agent to start scouting for you. Be willing to wait six months. Something will probably pop up and then you might have to wait a year to get that project but then you'll have the right one.”
Dallas Market
“In Dallas, we’re 96% occupied in retail. So we have a 4% vacancy rate, which is creating more of a challenge to find optimal space for our clients. Most of the available space in high growth, desirable areas are either proposed or under construction. So most tenants are having to wait for space to be delivered to occupy. If you’ve been looking for a while, you know that dynamic has been pretty consistent for the past few years. Patience is key in this current market, but with continued growth comes increased development, and with that, more opportunities will continue to present themselves over time.”
In summary,
Higher interest rates and low vacancy make the Texas medical real estate market tricky at the very least. Good sites - properties with ease of access, good demographics, low competition, signage, visibility, branding opportunities - are hard to find. That said, now is the perfect time to start saving to have plenty of cash in the bank to get financed quickly when market conditions shift. In addition, be open-minded and willing to wait. Connect with your real estate agent now, so he or she can be scouting for you, showing opportunities so you can educate yourself and get a lay of the land before you have to make a decision. Plenty of opportunity is left in Texas’ major metros, but our main advice for 2024 is to be patient, save, and look ahead.
