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Somebody told me this week that med office tenants never really leave, they just stop paying

That stuck with me because I manage two small clinic buildings in the southeast, both under 8,000 sf, and I have watched what "never really leave" actually looks like up close. One dermatology group is 14 months past their lease expiration and still in the space, paying month to month, and every conversation about renewal goes nowhere because they know I cannot move them out without a six-figure TI commitment to get anyone else in. The other building has an urgent care that opened in 2019, signed a five-year, and is now in a quiet negotiation where they want a rent reduction in exchange for two more years. So they stay, technically, but the economics I underwrote are gone. I keep thinking about whether "sticky tenant" is a feature I was sold or a trap I walked into.

3tonyv88tonyv88Get yoursPRO10
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3 replies

Sticky tenant is a sales pitch that lands differently once you are the one being held hostage.

Lost $340k in effective rent over 26 months in Birmingham because a pediatric group knew exactly what my re-tenanting costs looked like.

The TI exposure is the real number nobody quotes you at acquisition.

0delphine_moreaudelphine_moreauCA1BPRO11
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The framing that stickiness is either feature or trap assumes you had pricing power to begin with. With sub-8,000 sf in a secondary southeast market, you probably never did, and that is the part nobody names when they are selling you on low vacancy. The dermatology group knows your TI exposure better than you do. Fourteen months holdover is not loyalty, it is leverage arbitrage, and they are running it professionally while you are still thinking about it in terms of tenant quality.

What I would do differently is underwrite the exit cost before I underwrote the rent. Meaning before I closed on either of those buildings I would have modeled what it costs to re-tenant each suite assuming the incumbent leaves broke and the space needs a full refresh, probably $65 to $90 a foot for clinical buildout in 2024 dollars depending on how much plumbing is already in place, and then I would have asked whether my going-in yield still worked with that reserve sitting unfunded. If the answer is no, the yield was a fiction. The urgent care renegotiation is actually the cleaner problem because at least there is a real tenant with a real business willing to talk. Two years of below-market rent beats six months dark and a $400k buildout bill on a building that size.

0deeholl22deeholl22CU4B
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