Healthcare Tenants Push Forward on Lease Commitments

Healthcare tenants have shown more apprehension to make long-term lease commitments during the pandemic, but many are continuing to push ahead anyway and sign new leases, particularly for those that with upcoming renewals. JLL’s Los Angeles healthcare real estate team has signed several lease transactions in the last three months, even as the market continued to change and many in-person doctors’ appointments slowed down.

“We are seeing that most healthcare tenants know that they will need their space for the short and the long term,” Chris Isola, EVP at JLL, tells GlobeSt.com. “Work from home doesn’t really work for medical, as no doctor has an exam room or operating room in her house. Healthcare occupiers typically can only generate revenue in their premises. And despite a significant increase in telehealth, most of healthcare remains a contact sport. Therefore, in the last quarter we have completed a number of transactions and overall our transaction volume is comparable to 2019.”

During the pandemic, Isola and his colleagues closed six long-term lease deals for healthcare clients. “Many of these had a critical path towards completion before COVID,” explains Isola. “Nevertheless we were successful in avoiding any reduction in term length or change to the negotiated terms due to the pandemic. And, actually two of the renewals doubled in size. Additionally, we represented a major regional healthcare system on two sizeable new leases that were completed over the same period of time.”

In fact, subspecialties within healthcare are more confident about the future. “We are experiencing that the subspecialties in healthcare have a lot more confidence in making long-term decisions,” says Isola. “They are not affected by telemedicine and other lower reimbursement visits. Their visits are still vital where the patient needs to visit the medical office building for their treatment.”

While clients are still willing to look for new space and sign a lease, the process has changed. There are more negotiations and lenders have gotten more involved. “Lenders are now involved with the leasing decisions as well as each lease is reviewed by personnel higher up in the provider’s organization,” says Isola. “We have not seen any significant change in rental rates, nor an increase in sublease medical office space availability. We have, however, on a case-by-case basis seen an increase in landlord concessions being offered in order to preserve building occupancy. For the occupier clients that are seeking shorter-term transactions, we experienced more flexibility by landlords and a willingness to work collaboratively—again, seemingly with a focus on preserving occupancy.”

Landlords are remaining flexible to the changes, but many aren’t willing to make extra expenditures for tenants. While concessions have increased, free rent has become the most common concession. “Now the landlords are willing to offer more free rent in lieu of tenant improvements,” says Isola. “Although many of these landlords are well financed they are keeping their cash, which is understandable. We’ve also noticed an increase in the pursuit of healthcare tenants by retail landlords. Pre-COVID, many of the retail spaces that were being marketed toward healthcare were predominantly secondary or tertiary locations. Today, landlords of many prime retail locations are realizing that healthcare tenants may be the answer.”