Medical Office

Definition of Medical Office in Commercial Real Estate

In the context of commercial mortgages, a Medical Office Building (MOB) is a specialized sub-category of office real estate specifically designed, built, and leased to healthcare providers. Unlike traditional professional offices, these properties are equipped to support clinical services, outpatient procedures, and diagnostic testing. From a lending perspective, medical offices are often viewed as defensive assets because they are less susceptible to economic downturns compared to retail or general office spaces.

Detailed Description and Characteristics

A Medical Office Building is defined by several unique physical and financial characteristics that distinguish it from standard commercial properties. Lenders evaluate these assets based on their proximity to hospitals, the quality of the tenant base, and the specialized infrastructure required for healthcare delivery.

Key features of Medical Office properties include:

• Specialized Build-Outs: These buildings often require extensive tenant improvements (TI), including reinforced flooring for heavy imaging equipment, specialized plumbing for exam rooms, and advanced HVAC systems for air filtration and climate control.
• High Tenant Retention: Because of the significant capital invested in medical equipment and specialized layouts, medical tenants are considered "sticky." They are far less likely to relocate than general office tenants, providing more predictable cash flows for the borrower and the lender.
• Proximity to Health Systems: The most valuable medical offices are typically located on or adjacent to a hospital campus. This synergy between the hospital and the outpatient physicians creates a steady stream of referrals and ensures high occupancy rates.
• Compliance and Accessibility: MOBs must adhere to strict regulatory standards, including ADA (Americans with Disabilities Act) compliance for patient mobility and specific zoning for hazardous waste disposal or radiation shielding.

Commercial Mortgage Considerations

When underwriting a mortgage for a Medical Office, lenders look closely at the creditworthiness of the medical practice or the sponsoring health system. Because the cost of retrofitting a vacant medical space for a new tenant is high, lenders often require longer lease terms—typically 10 to 15 years—to mitigate risk.

Investors frequently seek commercial mortgages for MOBs due to the sector's recession-resistant nature. Even during economic contractions, the demand for healthcare remains stable, which often results in lower capitalization (cap) rates and more favorable loan-to-value (LTV) ratios compared to traditional office buildings.

Common tenant types found in these properties include:

• General practitioners and primary care physicians.
• Specialized clinics (Cardiology, Orthopedics, Oncology).
• Diagnostic laboratories and imaging centers.
• Ambulatory Surgery Centers (ASCs).
• Dental and orthodontic practices.