The demand for medical office space is greatest in the area near Clovis Community Medical Center, where new development is ongoing. Photo by Estela Anahi Jaramillo

Abandoned office spaces are finding a new purpose after the work-from-home surge. Renovation has opened the door for conversion into medical offices.

In Fresno, space is limited due to high demand in the growing medical office sector. As the health care industry continues to show significant growth, medical professionals looking to lease existing medical office spaces are finding them almost nonexistent.

The alternative? Renovating second-generation commercial real estate space for the needs of the medical business.

In a survey conducted by the Colliers International brokerage in Fresno, 21 properties already exist or could be potential medical office spaces, with an average asking rent of $1.51 per square foot. Of those listed properties, there is a 26% average vacancy rate.

The limited space can contribute to longer leases, as opposed to the traditional office sector with three-to-five-year terms, seven to 10-year leases for medical offices are not uncommon.

“That’s one thing that is nice about tenants in the medical field,” said Michael Schuh, senior vice president and principal at Colliers International. 

The more significant obstacle prospective tenants are encountering is construction costs. Many different reasons are attributed to the rising costs, including inflation, minimum wage increases and materials. Nonetheless, tenants and landlords are spending more of their budgets renovating buildings and even building from the ground up.

“We’re still in a very inflationary period with the cost of construction being one of the pressures pushing rates up and halting people from buying a building. That coupled with the fact that land is also more expensive than it’s ever been and it’s very difficult to find, and when you can find it — it’s expensive,” said James Bitter, a commercial associate at Fortune Associates.

If the space has to be built out from a shell or remodeled, agents have to negotiate with the landlord and the tenant on how much extra the tenant has to pay in rent. That is when a tenant improvement (TI) allowance or remodeling allowance is introduced. For a new building, the typical TI allowance that tenants will receive in the asking rent is about $45-50 a foot.

The cost to build a space out of an existing standard office is twice the amount.

According to Bobby Fena, senior vice president and principal at Colliers International, the tenant doesn’t want to come out of pocket and put money into a landlord’s building. So if the landlord is willing to give a tenant $50 a foot, but it’s going to cost $125, they amortize that cost in the form of additional rent on top of the rental rate over the lease term.

In the current environment, banks are being a little more restrictive on their lending. Those looking to build or renovate must have a business plan banks will like, but it is not guaranteed. Before, a bank would finance 75% of a project with the owners putting 25% down. Today, owners are putting even more down, meaning landlords must put much more capital into the project as banks pare down their exposure.

“Right now, banks are very tight with money. So it’s not going to be as easy as it was five years ago to build a new office complex – 50,000 square feet or so. Banks are going to require probably at least 50% to be pre-leased before they will give money to a developer to build out an office complex,” said Schuh.

Despite the unmet demand for medical office space, in the last couple of years, there has been significant growth in areas around local hospitals such as Clovis Community Medical Center, where the development is at a fever pitch. There’s also activity near Kaiser Permanente Fresno Medical Center, Saint Agnes Medical Center and Community Regional Medical Center.

Many doctors or dentists fresh out of school might not have the means to hang a shingle in the hot growth areas. Many end up taking more affordable space south of Shaw Avenue. There are openings near the former Valley Children’s Hospital location on Shields Avenue. Fena said many older medical offices fully equipped with sinks and cabinets in every exam room are available, but they’re not a favorite among medical professionals.

Many younger doctors coming into practice are going to either work at one of the hospitals or an existing group. That route is also a way to avoid costly overhead.

“It’s been a struggle for existing physicians looking to expand. I think one of the trends we’ve seen over the last couple of years is that you’re seeing more groups merge together and get larger. The days of the sole practitioner are kind of not as commonplace with younger doctors coming out and opening their own practice,” said Brandon Lamonica, associate at Fortune Associates.