What Institutional Buyers Look for in Medical Properties

Institutional buyers—including REITs, private equity firms, and pension funds—represent the most active and well-capitalized segment of the medical real estate market. Understanding their investment criteria and positioning your property accordingly can mean the difference between a competitive offer and premium pricing.

This guide reveals what institutional buyers prioritize when evaluating medical properties and provides strategies to make your building more attractive to these sophisticated investors.

Who Are Institutional Buyers?

Healthcare REITs (Real Estate Investment Trusts)

Publicly-traded companies that own and operate medical properties. Major players include:

• Physicians Realty Trust (DOC)
• Healthcare Trust of America (HTA)
• Healthcare Realty Trust (HR)
• Medical Properties Trust (MPW)
• Healthpeak Properties (PEAK)

REITs seek stable, long-term cash flows and typically focus on properties above $5 million with creditworthy tenants and extended lease terms.

Private Equity Healthcare Funds

Investment funds specializing in healthcare real estate, often with specific geographic or property-type focus. They generally target properties from $3-50 million and seek 12-18% IRR (Internal Rate of Return).

Pension Funds and Insurance Companies

Large institutional investors seeking stable, long-term income streams. They typically invest in larger properties ($10+ million) or portfolios, focusing on secure, investment-grade tenants with long lease terms.

Family Offices and High-Net-Worth Investors

Sophisticated individual investors or family wealth offices investing in healthcare real estate for diversification and stable returns. More flexible than other institutional buyers but still maintain professional investment criteria.

Core Investment Criteria

1. Property Size and Scale

Minimum Investment Thresholds:

• Healthcare REITs: Typically $5+ million minimum
• Private Equity Funds: Generally $3-50 million sweet spot
• Pension Funds: Usually $10+ million or portfolio acquisitions
• Family Offices: More flexible, often $2+ million

Properties below these thresholds require too much acquisition and management effort relative to return potential for larger institutional buyers.

2. Tenant Credit Quality

Institutional buyers thoroughly analyze tenant financial strength:

Investment-Grade Tenants (Most Desirable):

• Hospital systems and health networks
• Large physician groups with hospital affiliations
• National healthcare chains (DaVita, Fresenius, etc.)
• University-affiliated medical practices

Strong Tenants (Very Attractive):

• Established multi-physician groups (5+ years operation)
• Specialty practices with strong patient bases
• Practices with hospital employment contracts
• Well-capitalized professional corporations

Moderate Risk Tenants (Case-by-Case):

• Solo practitioners or small groups
• Newer practices (under 3 years)
• Practices facing competitive pressures

3. Lease Terms and Structure

Optimal Lease Characteristics:

• Lease Duration: Initial terms of 10+ years preferred, with weighted average lease term across all tenants exceeding 7 years
• Lease Structure: Triple-net (NNN) leases where tenant pays taxes, insurance, and maintenance are strongly preferred
• Rent Escalations: Annual increases of 2-3% provide inflation protection and cash flow growth
• Renewal Options: Multiple renewal options demonstrate tenant commitment and reduce re-leasing risk
• Corporate Guarantees: Personal or corporate guarantees from financially strong entities increase value

What Concerns Institutional Buyers:

• Leases expiring within 2-3 years
• Gross leases (landlord pays expenses) due to expense volatility
• Below-market rents with no escalations
• Month-to-month or short-term lease arrangements

4. Location and Market Fundamentals

Preferred Markets:

• Growing metropolitan statistical areas (MSAs) with population growth
• Strong demographic trends (aging population, higher incomes)
• Presence of major hospital systems and healthcare infrastructure
• Low healthcare facility vacancy rates (under 10%)
• Limited new construction pipeline

Strategic Locations:

• On-campus or immediately adjacent to hospitals
• High-visibility corridors with strong access
• Areas with high physician density
• Proximity to complementary healthcare services

5. Property Quality and Condition

Physical Attributes:

• Building Age: Properties under 20 years preferred; older buildings must demonstrate excellent condition
• Building Systems: Modern, efficient HVAC, electrical, and plumbing with documented maintenance
• Code Compliance: Full ADA compliance and current certificate of occupancy
• Deferred Maintenance: Minimal or no deferred maintenance; capital needs clearly documented
• Parking Ratio: Adequate parking (typically 4+ spaces per 1,000 SF for medical office)

Functional Design:

• Efficient floor plates with flexible exam room configurations
• Medical gas systems, specialized plumbing, and electrical for medical use
• Elevator access (for multi-story buildings)
• Modern common areas and building amenities

6. Occupancy and Income Stability

Occupancy Expectations:

• 95-100% Occupied: Premium pricing, minimal risk
• 90-95% Occupied: Strong pricing if vacancy is short-term or being actively leased
• 85-90% Occupied: Average pricing with value-add potential
• Below 85%: Significant price discount; buyers expect stabilization opportunity

Income Characteristics:

• Historical occupancy trends (stable or improving)
• Tenant retention history (low turnover preferred)
• Rent collection history (100% collection rate)
• Operating expense trends (stable or decreasing)

7. Financial Performance Metrics

Target Returns:

• REITs: Seeking 6-7.5% cap rates for stabilized, low-risk properties
• Private Equity: Target 7-9% cap rates depending on risk profile
• Value-Add Buyers: Accept 8-10% cap rates if clear value-creation opportunities exist

Financial Documentation:

• Three years of audited or reviewed financial statements
• Detailed rent roll with lease abstracts
• Operating expense documentation by category
• Capital improvement history with receipts
• Property tax history and assessment information

How to Position Your Property for Institutional Buyers

1. Optimize Lease Portfolio

Actions to Take:

• Extend leases 2-3 years before sale to increase weighted average lease term
• Negotiate triple-net lease structures where possible
• Include 2-3% annual rent escalations in new or renewed leases
• Secure lease extensions in exchange for tenant improvements
• Obtain estoppel certificates confirming lease terms

2. Enhance Property Condition

High-Impact Improvements:

• Replace or upgrade major systems (HVAC, roofing) if near end of life
• Update common areas with modern finishes
• Improve parking lots (resurfacing, striping, lighting)
• Enhance landscaping and exterior appearance
• Address all deferred maintenance items

3. Professional Property Management

Institutional buyers prefer professionally-managed properties with:

• Documented systems and procedures
• Organized maintenance schedules and records
• Tenant communication protocols
• Financial reporting systems
• Vendor contracts and relationships

Consider engaging professional property management 1-2 years before sale if currently self-managed.

4. Maximize NOI

Income Enhancement:

• Raise below-market rents to current rates
• Fill vacant space (even at slightly below-market rates)
• Add ancillary income sources (signage, antenna leases, etc.)
• Charge for previously free services (parking, storage)

Expense Reduction:

• Renegotiate service contracts annually
• Appeal property tax assessments if overvalued
• Implement energy efficiency measures
• Shop insurance annually for competitive rates

5. Organize Comprehensive Documentation

Institutional buyers conduct extensive due diligence. Have ready:

• Financial: 3 years P&L, rent rolls, leases, tax returns
• Physical: Property surveys, as-built plans, environmental reports
• Legal: Title insurance, certificates of occupancy, zoning letters
• Operational: Maintenance records, warranties, vendor contracts
• Tenant: Estoppel certificates, lease abstracts, correspondence

6. Address Red Flags Proactively

Common concerns that reduce institutional buyer interest:

• Environmental Issues: Obtain Phase I Environmental Assessment; address any concerns
• Title Problems: Resolve liens, encumbrances, or easement issues
• Code Violations: Bring property into full compliance
• Litigation: Resolve tenant disputes or property-related legal matters
• Zoning: Ensure current use is legally conforming

Understanding Institutional Buyer Process

Acquisition Criteria Screening

Institutional buyers initially screen properties against strict criteria:

• Does property meet minimum size/value threshold?
• Is location in target market or MSA?
• Do tenants meet credit quality standards?
• Are lease terms acceptable (duration, structure)?
• Does projected return meet investment hurdles?

Properties failing any critical criteria are typically rejected quickly, regardless of price.

Due Diligence Depth

Institutional buyers conduct thorough 30-60 day due diligence:

• Comprehensive property inspections (structural, mechanical, environmental)
• Detailed financial analysis and rent roll verification
• Market analysis and competitive positioning study
• Title review and legal compliance verification
• Tenant interviews and creditworthiness assessment

Expect detailed questions and document requests. Organized, prompt responses demonstrate property quality and professionalism.

Decision-Making Timeline

• Initial Screening: 3-7 days
• Letter of Intent: 7-14 days after initial review
• Due Diligence: 30-60 days
• Closing: 30-45 days after due diligence completion

Total Process: Typically 90-120 days from first contact to closing

Advantages of Selling to Institutional Buyers

• Competitive Pricing: Well-capitalized buyers pay market or above-market prices for quality properties
• Certainty of Closing: Strong balance sheets and established financing relationships reduce deal risk
• Faster Closings: Professional teams and established processes expedite transactions
• Professional Transactions: Experienced acquisition teams make the process smoother
• All-Cash Offers: Many institutional buyers use cash, eliminating financing contingencies

When Your Property May Not Fit Institutional Criteria

Some properties are better suited for private investors:

• Smaller Properties: Under $3 million may be too small for institutional buyers
• Significant Deferred Maintenance: Value-add opportunities requiring capital investment
• Short Lease Terms: Near-term lease expirations create too much uncertainty
• Weak Tenant Credit: Solo practitioners or struggling practices
• Secondary Markets: Smaller towns or declining markets

In these cases, private investors, local buyers, or owner-users may offer better opportunities.

Conclusion

Institutional buyers represent the premium segment of the medical real estate market, offering competitive pricing, transaction certainty, and professional execution. By understanding their investment criteria and positioning your property accordingly, you significantly increase the likelihood of attracting multiple offers and achieving optimal pricing.

The key is matching your property's characteristics to institutional buyer preferences: strong tenant credit, long lease terms, excellent property condition, optimal locations, and professional management. Properties meeting these criteria consistently achieve premium valuations in the marketplace.

Whether your property currently meets institutional criteria or requires positioning improvements, understanding these sophisticated buyers' perspectives helps you make strategic decisions that maximize value when you're ready to sell.