Changes in the commercial real estate market in terms of space availabilities, lease rates, and even landlord/owner negotiating postures, have been dramatic. Property values, and consequently prices, especially for retail and professional office buildings, continue to decline. But the gloomy scenario they describe actually presents what may be once-in-a-lifetime opportunities for those dental practices wishing to grow by repositioning or relocating their clinics.
At the same time, the market demand for space by healthy tenants continues to soften as well. As this scenario unfolds, owners and managers who are hard pressed to cover the fixed cost of operating their buildings are increasingly open to doing whatever has to be done in terms of concessions or incentives to attract new credit-worthy tenants or retain those they already have. In today’s difficult real estate environment, the attractiveness to a building owner of a stable, necessary, consumer health care service tenant such as a dental practice cannot be overstated. Quite frankly, the negotiating power of the typical dental practice in the marketplace has never been greater than it is today.
Dental Clinics: A Bright Spot in Today’s Real Estate Market
There are only a few bright spots in our current “slow or no” growth economy. One of them is the health care sector. Spending on health care services has grown by more than 220% over the last half century, and it continues to be one of the only sectors to increase employment in the teeth of this recession. Dental services
of all kinds currently account for more than five percent of total health care spending, and are continuing to grow. That growth rate, and the fact that dentistry is an essential consumer need, has caught the attention of building owners, managers, and leasing agents. Dental practices represent one of the most desirable pools of prospective tenants in today’s real estate marketplace, a position which is giving them unparalleled negotiating leverage in leasing or acquiring real estate.
Emerging Trends in Clinic Locations: Getting Your Practice’s Real Estate “Right Fit”
Today’s leading practices have built their success on a combination of efficient operations, implementation of advanced technologies, superior professional staff, and, in many cases, extremely sophisticated consumer
marketing. To that mix should be added yet another critical factor in practice growth: getting the “fit” right
in selecting the clinic’s geographic location, and in leasing or purchasing the right property.
Most striking is the current convergence between the way consumer goods and services are offered in the retail marketplace and the delivery of highly specialized consumer health care services such as dentistry. The advantages of this merger between medicine and traditional retailing settings are becoming increasingly evident:
• Clinic placement in a traditional retail environment or a retail-like property offers immediate benefits in terms of ample dedicated parking, easy pedestrian access and maximum convenience for current and prospective patients as well as clinic staff.
• Close proximity to other retail businesses, seven days a week, significantly enhances clinic visibility,builds name recognition and recall, and increases the opportunities for walk-by or drop-in appointments,as well as the chance discovery of the clinic by customers of surrounding retailers.
• The typical retail setting, whether a strip center or mall, generally offers multiple exterior signage opportunities not available to a practice located in a professional building.
Positioning Your Practice for Future Growth
The strategic positioning of your clinic — geographically and demographically — is a critical factor in practice success. Choosing the right location can make all the difference in terms of clinic growth or its stagnation. The building blocks of solid real estate positioning for a dental practice never change. In sorting though newly available locations arising from today’s troubled real estate market, it will be worthwhile to keep several principles in mind.
• Choose a location that offers the potential for predictable and growing revenue streams. Assuring a stable
and long-term viable business model requires a location that has consumer depth and breadth, one that will deliver the patient count your practice will need well into the future.
• Commit to investing in the core assets required (in terms of operating space and technology) to providethe capacity to generate the revenues needed, even in a constrained market.
• Communicate to your community and your market area a clear vision of your business as a vital health care
service that is accessible and patient service focused.
• Develop a consistent business model that drives future practice growth, based on a long-term plan, and a mission for the practice as a strategically important health care provider to the larger community in which it is located.
In today’s difficult market, property owners and managers are offering significant incentives to dental practices who meet these criteria. Because most dental clinic leases involve terms as long as 10-15 years and include a major personal investment in the clinic’s design and construction by the owner of the practice, many building owners and managers are targeting them with a range of new and enhanced tenant offerings. Although mostly focused on the economics and terms of the lease, they sometimes are willing to offer other benefits as well. Among them:
• Significant build-out allowances, paid by the owner, ranging between 30-45% of total clinic construction
• Free rent, typically for a portion of the first year’s occupancy.
• Expansion and special contradiction rights within the professional building or mall or strip center.
• Exterior promotional signage on monument entrance signs, building walls, and other tenant identification
systems and opportunities.
• Exclusivity agreements for a dental clinic operation within the buildingor property.
• Patient-exclusive parking rights in the center’s parking lot.
• Clinic inclusion in the center’s own overall advertising, marketing, and promotion programs.
Small Business Administration Offers Comprehensive Financing for Clinic Expansion
Despite the tight credit market which is restricting the flow of capital to most small businesses and some types
of professional practices, money to finance dental clinic expansions remains readily available through the Small Business Administration’s popular 7A and 504 loan programs.
Administered through most local banks, the federal government guarantees up to 90% of the total loan amount. These SBA programs can cover every aspect of a clinic’s expansion, including the acquisition of real property, equipment and technology purchases, as well as the cost of building out the clinic space. The SBA’s loan programs have recently been enhanced by the elimination of most of the fees involved, an action taken by the
administration as part of the Recovery Act stimulus legislation.
Incorporating SBA financing early in the process can provide an extremely strong bargaining position from which to enter negotiations over a building purchase or the lease of new space. Eliminating the need for financial contingency clauses at the very beginning of negotiations can expedite a successful transaction,
to the benefit of the party acquiringthe property or leasing the new space.
Depending on the financial strength of the practice, conventional bank financing without the need for SBA loan guarantees may also be available. The financial community recognizes the inherent stability and long-term appreciation of most established dental practices, making them particularly desirable as customers.
If Expansion is in Your Plans, Take Advantage of This Market
This is an excellent time for dental professionals to take steps to position their practices for future economic
growth by taking an opportunistic approach to anticipated real estate or space needs. Most dentists lease, rather than own, the space required for their clinic operations. Although a strategically located building or development site occasionally becomes available, it is only through leasing that a clinic is likely to acquire the
many advantages of a productive location. This is particularly true in the Twin Cities metro area and in the
larger cities in the state, where first and second ring suburbs are fully built out and few desirable opportunities
remain for construction of new clinic facilities.
For practices who lease space, current and anticipated market conditions could not be more favorable. Lease rates are likely to remain flat or even decline, and owners and property managers needing to keep their buildings occupied and current tenants happy will continue to offer more attractive terms.
Act Now to Grow
With conditions predicted to worsen before they begin to improve, today’s real estate market offers a window
of opportunities for growth-focused dental practices to accelerate their expansion plans and improve their bottom lines — opportunities which are unlikely to be repeated any time in the foreseeable future.
*Mr. Junnila is president of the Junnila Company, Inc., Minneapolis, Minnesota.