Dental Office Rental Rates on the Rise in 2013

(Jeremy D. Behar, CEO of Cirrus Consulting Group, is our guest blogger today at Sidekick Magazine)

Market Report: Dental Office Rental Rates on the Rise in 2013

In Brief: Through the remainder of 2013 and 2014, we expect the dental office real estate sector to continue to strengthen across the country, making it more difficult to avoid increases in rents at renewal time for dentists. We also expect landlords to reduce the amount of tenant inducements they are willing to offer dentists at either renewal or startup as their buildings lease up. This analysis outlines how the potential cost savings from renewing now could be up to $127,500 over a 5-year term. As a result, we encourage dentists to approach landlords at least 24 months before their renewal date to maximize cost savings and decrease their exposure, adding increased value to their practices through lower occupancy expenses.

The North American dental office leasing market, after several years of flat occupancy rates as well as minimal rental rate increases, is now showing a sign of expansion as the economy shows signs of growth. The overall U.S. office vacancy rate continues to decline, dipping from 12.7% at mid-year 2012 to 12.1% as of June 30, 2013, and is projected to move steadily downwards over the next three years. Additionally, landlords point to strong demand for 2014 deals which are posed to accelerate the decline in occupancy rates over the next six months . In addition to this, and specific to the dental market, the number of startup practices signing new leases across the US and Canada through the first half of 2013 is 16.8% higher than the same period in 2012 leading to more demand, and shrinking the supply of space available to dentists in many centers.

What does this mean for the average dentist in the country today?

Research and data all point to landlords being more bullish over the next few quarters as they manage their buildings which have less vacancy, generally, than at any time over the past 5 years. The likelihood is that, at the next renewal negotiation with landlords, landlords will be trying to push their net effective rental rates up in order to make up for years of modest rental rate and income growth. In addition to this, we are noticing that landlords are sending out fewer notifications to their dental tenants in advance of their upcoming expiry dates – likely an attempt, in our opinion, to more strategically set themselves up to capture higher renewal rates from their dental tenants.

Dental practice management consultants have always suggested, as a guideline, that occupancy costs (rents) in the average dental practice should be no more than 8-9% of total production. Unless production/revenue grows along with the forecasted and proportionate increase in rents, the cost of rents as a percentage of practice production will increase. This is a concerning trend that we are seeing in dental practices nationwide. For the first time in over a decade, this will contribute to an erosion of profits for dentists. In other words, the take-home income that a dentist receives from his or her practice is decreasing as landlords (at renewal time) are increasing the practice’s overhead (rental expenses). As a result, rents are now quickly becoming the second largest expense in a dental practice behind staff costs. Down the road, the picture gets uglier: when a landlord successfully raises rents for a dental practice, those rents continue to increase each year through the remainder of that term of the lease – so it’s not just a one-time hit, but rather, a series of cost increases over a long period of time.

What Can A Dentist Do to Avoid Significant Rental Rate Increases?

Our consultants are advising dentists in most markets across Canada and the United States to approach their landlords well in advance of the end of the lease in order to renew the lease on the lower end of the upwards trending rental curve. Where dentists historically approached their landlords 3-9 months prior to the end of the lease, we are now strongly encouraging dental offices to commence the renewal process 2 years (24 months) in advance of the end of term. We have tracked this recommendation over the past 2 years, and as outlined below, have discovered that at the rates in which most market rental costs are increasing, a dentist would in theory save themselves over $127,500 in rent over the next 5 years if they renewed today, 24 months in advance of the expiry date, then in 1 year from today, with only 12 months left at that point.

Cirrus Consulting Group is the North American leader in helping dentists grow and protect their practices by properly and effectively setting up their Dental Office Lease Agreements in a smart, efficient and strategic way. Since 1994, Cirrus has provided high-value research tools, seminars, and services designed specifically to help the dentist save time, money, and maintain a fair and equitable relationship with one of their single largest suppliers – their landlord.

To learn more about Cirrus Consulting Group, visit www.cirrusconsultinggroup.com. To speak with one of the professionals at Cirrus about you and your lease agreement, simply dial 1.800.459.3413 or email us at info@cirrusconsultinggroup.com.

Author:
Jeremy D. Behar, CEO
Cirrus Consulting Group
1.800.459.3413