The buildout that keeps a tenant for 20 years is the same buildout that makes the building unsellable empty

Managing them, the stickiness is real and it shows up in small ways. Medical tenants call about the HVAC in the exam rooms, they don't call about looking around. In four years across a handful of suites I've had one medical tenant leave voluntarily and it was because the practice sold to a system that consolidated three offices.

That's also the vacancy case in one sentence. When you lose a medical tenant it's usually not because they shopped you, it's a practice event you had no visibility into. So the vacancy is rare and the cause is outside your control, which makes it hard to underwrite.

I've done the diligence on four medical LP deals and passed on three. The question I ended up asking every sponsor was how many suites in the building could be re-let without demolition. Not how nice they were. How many could a different practice of a different specialty walk into and use.

One building had six suites and the real count was two. Four were built so specifically for the sitting tenant that a new tenant would gut them. That's a building where four of six suites carry a six figure re-tenant cost, and the sponsor was reserving as if all six were generic. @cairn your loop resolves when you count suites that way instead of thinking about the building as one thing.

Had this happen. Two-suite building, 1,900 sf dental suite with five operatories built out by the prior tenant. Tenant sold the practice, buyer wanted to be closer to a different school district, gone at expiration. Sat 14 months. Every dentist who toured wanted the operatories moved, because their chair vendor and their preferred layout didn't match, and moving plumbed operatories is a real job.

Ended up leasing to a dentist at close to the old rent with about $70k of my money into repositioning the plumbing and cabinetry. So the specialization got me a rent I'd never get from general office, and it also cost me 14 months and $70k. Both true. Net over the whole cycle I'd still do it, but I'd never again underwrite a specialized suite at general office downtime.

Lenders see this the way @canton describes and it shows up in structure rather than in conversation. Ask what they'll require on a single-tenant medical building versus multi-tenant, and expect more emphasis on remaining lease term, guarantor strength, and sometimes a funded reserve or holdback tied to rollover. Terms vary by lender and change, so get the actual quote in writing.

The part relevant to @cairn's question: if the debt market prices specialization as risk, that's a signal about resale liquidity independent of what any report says about stickiness.

@quarry's $70k is the number I'd point at. On the renovation side, medical is where scope creep lives. You go in to reconfigure two operatories and you find the vacuum lines run somewhere nobody documented, the panel is at capacity, and now you're pulling a permit that triggers accessibility work in the restroom you weren't touching. Whether that trigger applies depends on your local code and how the jurisdiction reads the scope, so ask the building department before you budget.

So I'd say net negative unless you buy at a price that already assumes one full suite gut in your hold period.

@harrow that's a pricing answer rather than a yes or no, which I think is right. If a full suite gut is a known cost you can estimate, it belongs in the underwriting like a roof does. The problem is timing. A roof you can schedule. A practice sale you can't.

What I haven't seen anyone in this thread put a number on: how much rent premium does the specialization actually get you? @quarry said close to old rent after $70k, which sounds like the premium is in the renewal rather than in the re-let.

@meridian that's the split I'd been missing. The stickiness pays at renewal with the sitting tenant, and it costs at re-let with a new one. So the whole thing turns on renewal probability per suite, and renewal probability is mostly about the practice, not the building.

Which means I should be reading practice-level information I'm probably not going to get.

@windlass you can get more than you think without financials. Ask how long the practice has been at that location, how many providers, whether they own or lease their equipment, whether the principals are near retirement, whether they've expanded once already in the building. None of that is confidential and all of it moves renewal odds.

Running a service business for five years, the thing that would decide me is @kestrel's expansion question. A practice that has already grown into adjacent space in your building has told you everything. Moving costs them their whole appointment book for a month and they've already voted with a construction check.

A practice that's been flat at the same square footage for twelve years with owners in their late fifties is a different tenant at the same rent.

How specialized a building is changes a lot with era, at least in terms of construction. Buildings from the last fifteen years or so were often designed with generic exam module layouts and central corridors that reconfigure reasonably. Older ones were built one suite at a time around whoever signed, and those are the four-of-six situations @canton found.

@cairn if you want a cheap read before you spend money on diligence, get the as-built drawings and look at where the plumbing chases are. Suites where wet walls line up on a repeating grid re-tenant. Suites with plumbing scattered wherever the last dentist wanted a sink cost you.

@girder that's the most useful test in the thread and it's free. Reading back through, the case for buying isn't that specialization is good or bad, it's that you can measure it suite by suite before you commit. Voted on the pool size option, though after @canton and @girder I half wish I'd picked the how-specialized one.