Maximizing Benefits of Dental Real Estate Trends

Real estate decisions are crucial for dental practitioners. Why? For starters, medical office leases tend to belong-term deals, and have the potential to have a great impact on the future of the dental practice.

In addition, the logistics can be daunting. No one wants to pick up and move all that equipment and technology twice within a year or two.

“Just the plumbing component to a typical dental build-out is substantial,” says Phil Denny, co-owner of Peppercorn Capital, a Chicago-based real estate investment and development company. “When dentists and doctors build out a space in your building, they’ve got to make such a substantial capital commitment to the premises that they end up staying for tremendously long periods of time.”

And as the saying goes, the three most important things to consider in real estate are location, location, and location.

A Growing Trend

Denny explains that over the last few years there’s been a trend by different segments of the population, from millennials to baby boomers, to move into downtown areas and create neighborhoods. In turn, that trend is driving development opportunities for commercial office buildings, restaurants, schools and medical office buildings.

“There’s a trend in Chicago, and I know it’s alive and well in other cities too, of people wanting to live closer to where they work,” Denny says. “And there’s a trend of companies moving back to the cities to try and attract the talent that’s in those areas.”

What happens is a domino effect. As neighborhoods begin to develop around restaurants, nightlife and office complexes, apartments, condos and schools will follow. Likewise, the need for services like medical and dental. All of those elements, Denny says, begin to play off one another.

“It’s just a common path that seems to occur.”

Important Considerations

Denny explains that when it comes to real estate, it’s critical to any business to find the absolutely best location for the best price—and dental practices are no exception. One aspect to addressing that challenge is for dentists to work with a reputable real estate broker who can assist in finding neighborhoods with populations that will enable the practice to operate successfully.

For example, Denny’s firm recently signed three medical office leases for dental-related service providers, and the role of the real estate broker was invaluable.

“We worked with a broker who really specializes in assisting dentists and dental-related practices find the ideal location,” Denny says. “He was very knowledgeable about alternatives within different neighborhoods, as well as issues like parking, proximity to residential buildings and schools. It’s critically important that the broker understands the uniqueness of what a dental practice might require.”

Denny says dentists are so busy with their practices that they don’t have the time or the ability to conduct a search the way a knowledgeable broker might. For example, the availability of parking proved to be a key factor for all three of the dental practices that recently signed leases with Denny’s firm.

“Those decisions (made by the dental practices) were really based on almost a triangulation of schools that are new to the area and residential developments that are in the area as well,” Denny explains. “I guess the assumption is that somebody is picking up the kids at school—and on their way home or on their way to the grocery store there’s a dental practice that’s nearby that has parking. Parking seems like it’s a really critical part of the decision process.”

Financial Considerations

Denny says that when dental practices make a large capital investment in real estate, something that often gets overlooked from a strategic perspective is how the rent will increase over time.

“For somebody making a large investment in building out their space, you would like to see as long an initial term as possible,” he says. “Ten or 15 years, for example.”

Alternatively, however, it’s in the best interests of the developer or business owner to try to limit the length of the initial lease, thus providing an opportunity to increase the rent comparable to other real estate in the neighborhood. Often, there may be a provision in an initial 10-year lease allowing the landlord to increase the rent during the renewal option if the neighborhood has grown and/or improved.

“That could effectively double a dental practice’s rent,” Denny says.

That means it’s particularly important for dentists to be well advised in terms of legal counsel, but also with regard to their real estate broker.

“A good attorney or a good broker will help a dentist secure as long a lease as possible,” Denny says. “They’re critical to protecting dental practices from seeing their rents increase substantially through option periods. And they know how to drive the best possible bargain for their clients.”