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Leases Can Help Providers Control Occupancy Costs

Physician groups seeking to control occupancy costs should evaluate their office lease. By taking an aggressive approach to leasing, firms will enjoy improved financial health by eliminating excess square footage and associated expenses. But they must start the process early; those who postpone the process are taking big risk—that a last-minute search will uncover a suitable and affordable space.

Chad Gunter, a senior vice president of healthcare advisory services in Transwestern’s San Antonio office, suggests that physician practices begin preparing for a medical office search at least a year before their current lease expires.

“Start with a self-assessment to identify features in the current space that help or hinder the business,” Gunter says, adding that practices should consider working with an architect experienced in healthcare design, or a workplace optimization specialist to plan a cost-effective layout that doesn’t sacrifice function.

Most practices sign long-term leases, and for those who’ve been in the same space for 15 years or more, likely requires streamlining and modernization. Technological advances, including the shift to electronic medical records, have reduced space requirements.

When starting the search process, practices need to consider whether their patient base has shifted to a different submarket. They also need to think about which locations would best serve their patients.

Once a physician practice has identified the best office options and created a space shortlist, it should dig into tenant-improvement allowances and “overages”—the expenses the tenant must pay for building out shell space for medical use. One question that must be asked: Will the landlord amortize the tenant’s build-out cost over the life of the lease?

Gunter notes that landlords will often increase the tenant allowance, in exchange for a longer lease term. Longer lease terms aren’t just beneficial to landlords, either. For tenants, longer lease terms provide more predictable occupancy costs, along with the opportunity to define periodic rent increases and renewal options in advance.

Gunter has one final tip for medical tenants—request separate utility metering during lease negotiations. “Shared electric bills in a building that contains imaging labs or other high-usage activities increase utility costs for all tenants, so seek billing for actual usage where possible,” he advises.

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