Hospital system at a 6 cap or independent doctors at an 8, if you only get to own one

The renewal squeeze you mention is real and I've watched it from the leasing side while studying for my license. A system with forty locations sends someone whose whole job is to know your comps, your vacancy, and how long your suite would sit. An independent doctor sends the office manager and his own attachment to the exam room layout he paid for. Different negotiation entirely.

The fork isn't really credit versus yield, it's what your rollover reserve has to look like. On the 8 cap building I'd underwrite $70 to $100 per sf of TI on every medical suite that turns, plus 6 to 12 months of downtime, plus commissions. Run that through a ten year hold with three or four suites turning and a chunk of that 200 basis points of extra yield is already spent. If it survives that test, the off-campus building usually wins because the going-in basis is lower and the supply picture supports the rent you're re-leasing into. If your reserve assumption is $35/sf because that's what conventional office costs, you're comparing a real 6 to a fake 8. @canton, what TI number are you carrying?

Naive question, is the specialized build-out an asset or a liability at the ten year mark? Sounds like both depending on who walks in next.

@plumb it's an asset if the next tenant is the same specialty and a liability otherwise. Imaging shielding is worth a lot to another imaging user and worth nothing to a pediatric practice that needs eight small rooms where the vault is.

I'll bring the arithmetic because the framing hides it. $60k of income at a 6 is $1m, at an 8 is $750k. Put 60% debt on each and your equity is $400k versus $300k. Now assume the 6 cap has 11 years of term and 2% bumps, and the 8 cap has average 4 years of term with three suites turning in the hold. Model the 8 with @sextant's $85/sf and nine months downtime and my version of that building produces less total cash over ten years than the 6 unless market rent grows better than 3% annually. That growth assumption is the whole argument. Falling completions in 2026 make it more plausible than it's been, and it's still the number I'd stress test first. Change it to 1.5% and the answer flips.

Coming from zero here, and the thing that surprises me is that anyone can get an 8 cap in a sector everyone calls defensive. Is the spread mostly about tenant size or is it about the location being off-campus?

@ember both, and add building age and how far the box is from where patients actually get referred. I've got eleven medical buildings on my list and the ones quoted highest yield are 1980s two-story shells six miles from any hospital with three suites rolling inside two years. The yield is compensation for work someone has to do. Sometimes it's compensation for work that can't be done because the location stopped making sense when the system opened a new campus across town.

Reading all of this and voting for the system lease, mostly because @sextant's TI numbers scared me and I don't have $300k sitting around for suite turns.