Trisha Talbot: Mastering Medical Office, Real Finds Podcast #6 Transcript
Gordon Lamphere: Hi, I’m Gordon Lamphere with the Real Finds Podcast, the podcast where we interview key entrepreneurs, scientists, and activists who are shaping the real estate industry and, as a result, our world. On today’s podcast, we’ll be speaking with Trisha Talbot, host of the Providers, Properties, and Performance podcast and Managing Principal of DOCPROPERTIES. Trisha is one of the leading voices in healthcare real estate investing. On the podcast, we discuss the keys to building strong industry relationships, tricks to investing in a rising interest rate environment, and strategies for successfully performing a medical office 1031 exchange. Hey Trisha, great to have you on the podcast today. Could you give a brief introduction to your background and your unique aptitude for medical office space?
Trisha Talbot: Sure. My entire career has been in medical office and healthcare real estate. I started as an in-house leasing agent for a developer of medical office buildings. Since then, I’ve gone into third-party brokerage, had a large landlord leasing portfolio at one point, then got into investment sales and corporate representation. So I have a 360-degree view of probably every facet of healthcare real estate.
Standing Out as a Young Broker
Gordon Lamphere: You do a great job differentiating yourself in a pretty dense real estate crowd. How can a young broker differentiate themselves in the industry?
Trisha Talbot: That’s becoming tougher, because with the pandemic, all the senior brokers I know started working from home, and I don’t know that they’ve gone back. That makes it really tough for young brokers to learn, because a lot of it is through osmosis. The best thing is to find a team where you can add value. As a young broker, you’re going to do a lot of market research and detail work, so position yourself with a business degree, finance, accounting, whatever helps in that arena, along with really great organizational skills, so you can support these brokers. Your goal as a young broker is to make the senior brokers as efficient as possible, because they’re the ones going out and getting the deals and the clients, since you don’t have that network yet. The more efficient you make them, the more you learn, and the more access to clients you get, and eventually you develop your own client base. It’s really hard to start out in brokerage on your own. The internet is both a connector and a challenge. Zoom and social platforms are great at connecting you once you have an established presence and track record, developed offline, that you can support online. But as a young broker, it’s hard to start virtually and be successful.
Gordon Lamphere: Real estate is all about relationships, and it’s particularly hard for a young broker in a flat, internet-driven world to develop them. You’ve built relationships across the medical office industry. Any advice for keeping and maintaining strong relationships?
Trisha Talbot: Quite honestly, I was a deal junkie for many years, and the more deals you do, the more people you connect with. From there, you develop relationships with people who operate the same way and value each other’s personalities, and you grow more business together because there’s no friction. When you streamline how you operate, things get done quicker. You anticipate what your client needs and help them organize and make decisions faster, because they typically have stakeholders too, investors or business partners they need to communicate deal points and opportunities to. The better you can do that for them, knowing what’s important to them, the more you get done together.
Medical Office Versus General Office
Gordon Lamphere: A lot of folks looking in at the industry, or generalists within it, don’t understand the unique aspects of each asset class. What are the key differences between a medical office property and a typical office property?
Trisha Talbot: In general office, you typically have a receptionist, a bullpen, maybe exterior offices, and a break room. I think 80% of users have that same setup with small differences, maybe more than one conference room or different sizes. That layout works for an attorney, an insurance company, a logistics company, with a few tweaks. In medical office, you can have five tenants and five completely different build-outs. A dermatologist, an orthopedic group, a cardiologist, a family practice, and an imaging lab all have different setups, and sometimes different standards even within companies. A national firm will say, this is our footprint, how can you make it work in your building? Each tenant requires a different build-out.
What’s good about that is lease term. In general office, you sometimes get long-term leases in new buildings, but three to five years is typically the max. In medical office, because of the highly specialized build-outs the landlord typically has to fund part of, landlords get long-term leases. Standard leases, even in second-generation buildings, run toward seven to ten years, which gives a lot more stability. The sexiest commercial real estate food groups right now are industrial, for last-mile, and multifamily, which continues to be incredibly attractive. But last-mile industrial will saturate at some point, because there are only so many warehouses you can have. And with multifamily, which I don’t underwrite much, you’re underwriting one-year leases, maybe six months to two years max. Nobody signs an apartment lease saying they’ll be there five years. Investors lease those up and sell them, for the most part. In medical office, investors are more long-term. It doesn’t get the super highs and lows of other asset classes, but it’s really steady. Right now, looking at a recession or turbulent economic climate, healthcare is a great investment, because an investor can say, I’m going to purchase this now, and for the next ten years I can count on this cash flow.
Gordon Lamphere: As someone who works with less predictable asset classes, I find that interesting. Can you touch on the predictability of the medical office investment?
Trisha Talbot: Healthcare properties are purpose-built and mission-critical. There’s a reason for the tenants to be there. They need to be there to generate revenue, or if it’s a hospital group, the hospital placed them there for a strategic purpose, to see patients in that market. Practically, you don’t get procedures in your home, and it’s more efficient for physicians to have patients come to them. So when an investor looks at a healthcare property, they’re looking at long-term stability. There might be ten years of lease term, or a WALT of eight and a half years, and they know they’ll have five years of strong, predictable cash flow because the tenants are stable and financially strong. After that, they’ll probably renew a couple and then sell. It’s a property that adds stability and predictability to a portfolio, and going into an uncertain economic climate, healthcare properties give you a pretty predictable, recession-resilient return.
Gordon Lamphere: We’ve seen that in our own portfolio. Our hospital and medical assets were very resilient through COVID-19. Did you see that in the properties you worked with?
Trisha Talbot: Absolutely. Landlords in the space reported receiving over mid-90% of their rents. A lot of tenants qualified for PPP loans, and a lot of landlords initially put together PPP help programs with information and links for their tenants. Even though some were closed for a few months depending on the state, they returned to health pretty quickly, because people still needed healthcare. If you have cancer, you still need chemotherapy. If you have a chronic condition, or you just want to stay on top of your health, you’re not going to forgo a physician for a long time. Pediatricians still had to see babies, who grow pretty fast in their first two years. A parent isn’t going to skip the pediatrician because of a pandemic.
What Drives a Good Medical Office Deal
Gordon Lamphere: Investors look for growth. When you’re looking long term, what factors drive a good deal for your investors?
Trisha Talbot: Population growth. Where there are people, there’s a need for healthcare. There’s a lot of interest in the Sun Belt, the smile states, but I see transactions everywhere. If you’re in a city that’s growing, great, but rural communities need healthcare as well. It’s wherever people are, and there isn’t a lot of product. Here in Arizona, we have a lot of sprawl. Master-planned communities of hundreds of homes get developed in the suburbs, and then there are no services for a 30-minute drive, not even grocery stores for a while. So a dentist or family practice opens up. Then there needs to be a multidisciplinary clinic, which typically starts with a cardiologist one day a week, a urologist, an orthopedic group, and they build a patient base and need to see more patients. They might start in a strip center, but that’s not the best location. When you’re seeing sick patients, for their dignity, it’s nice to be in a medical center. That usually migrates into a small medical office building, which fills, and then you build another one. Wherever growth is happening and medical services are needed, the supply of practical properties, located toward the hospital and near patients with easy access, matters.
Gordon Lamphere: What does a typically good deal look like for you? Do you look for development, redevelopment, or value-add through leasing, or all three?
Trisha Talbot: It depends. On value-add, there are very experienced, sophisticated landlords in the healthcare space who want to buy a second-generation medical building with good bones where, for whatever reason, tenants have left. Sometimes a hospital was there ten years and decided to build its own building. Sometimes the previous landlord didn’t have healthcare experience, treated the healthcare tenants like other tenants, and the tenants got sick of it, or the property wasn’t kept up. It has struggling occupancy and maybe some capital improvements needed, and these buyers know what to do. They can underwrite it, turn it around in X months and sell it, or keep it long term. That also happens with owner-users, who may want a building with some tenants for rental revenue but need space for their practice, and don’t want to buy at the top of the market because they want the economic benefit as the company occupying most of the space. Then there are investors who don’t want to lease up space and only want cash flow. They want a healthcare company to develop its own building with its own cost of capital, and once there’s a lease on it, they’ll buy it with the lease in place. There are sale-leasebacks. There are a ton of different structures, and it depends on whether you’re purchasing for cash flow or for value, like any other asset class.
Gordon Lamphere: Most of our listeners aren’t institutional investors. Is there a method that works best for an inexperienced investor versus an experienced one?
Trisha Talbot: Yes, but they don’t usually like it, because I recommend they JV. There are a lot of opportunities to joint venture, and I think private capital is going to be heavily active this year. If you have private capital and want to mitigate risk, partner with somebody who has a ton of experience in this space, or get into a partnership where some people bring capital and some bring knowledge, and maybe you’re the glue that puts them together. Private capital shouldn’t put all its eggs in one basket, and the best way to avoid that is to develop mutually beneficial partnerships. If you find a good one, you can replicate it deal after deal.
Gordon Lamphere: For someone interested in doing that in medical office, what’s your best recommendation?
Trisha Talbot: My insight isn’t necessarily healthcare specific: be easy to work with and flexible. You’ll come to the table with structures that have been successful in the past, but listen to people who’ve done structures unique to the asset class. For example, in medical office, and it waxes and wanes, offering ownership to physician groups. They’re not voting members and not part of decision making, but you give a percentage of ownership in exchange for signing a 10- or 12-year lease, and maybe offer a piece they can buy into if they want to own more. Those structures are among the most successful. It keeps the tenant sticky, and they tell their friends. The success of a medical office building is a tenant mix that wants to stay, because leaving makes it more difficult for their patients. If a family practice uses a lab and imaging center in the same building, and there’s an orthopedic group, and they have a referral patient base where it’s easy for the patient, that’s stickiness. When you get into the mind of your user, they care about their patients. If you’re concerned about their patients and you help them, you’ll be a successful healthcare real estate investor.
Doctors are a different breed. They’re intelligent, but they have very little time. They want information, and they want it quickly. Sometimes you have to let them think they know more than you, and that’s hard when there are a lot of egos in the room. Doctors have big egos, and if they didn’t, they probably wouldn’t be very good at what they do, because they wouldn’t be confident. You have to understand your target market really well, and be flexible and easy to work with. But over the twenty-plus years I’ve been in this business, if you develop a strong relationship, they stay. If you buy another building and they need another site, they continue with you, or they share your name with friends. If you have a good reputation with this client base, they’re pretty loyal, partly because they don’t have time to start a new relationship if they don’t have to. If they can develop a good team of people they know, they stay with them.
Investing in a Higher Rate Environment
Gordon Lamphere: We’ve had great relationships over the years with physician investors, and that’s very true. They don’t have the time because they run high-intensity practices, and as long as you deliver good returns, you’ll have a great relationship. On the note of capital, we’re entering a unique period. We were in a Goldilocks period of ridiculously low rates by the standards of the last hundred years, and now we’re in a much higher interest rate environment. Has that changed the dynamic for investors?
Trisha Talbot: It depends on who you’re talking to. I remember buying my first house at an eight and a half percent interest rate, so historically we’re still low, but higher than we’ve been. If you’ve only been in the market ten years, you’re getting hit like a brick, because rates have doubled in 18 months and that’s hard to digest. Then there are people who’ve been through a higher rate market before, and you adjust. Will you be able to buy as big a building? Maybe not. Do you take a smaller piece or reduce your returns a little? Do you have to raise more equity than debt? Probably. There are different ways you’ll have to put deals together to achieve the same or better returns. People will have to dig in, get creative, and run numbers. Is it going to be as easy? Absolutely not. You’ll have to come up with strategies that work in a higher interest rate environment.
Gordon Lamphere: In other asset classes, the high rate environment has affected build-outs in particular, because people are asking how much capital they’re deploying and there’s increased hesitancy to spend big on build-outs. Medical office is known for expensive build-outs. How do you approach build-outs on an investment, and are there strategies to manage and mitigate costs?
Trisha Talbot: Medical office tenants expect a landlord to contribute. It’s easy now to say a typical medical office build-out is about a hundred dollars a square foot. For specialty build-outs, while tenants would love the landlord to pay for it, they’re experienced enough to know that if their build-out is $150 a foot because it’s super expensive, they’ll get what they can from the landlord and fund the rest. They know in their heads what it costs to open a new site. Using a hundred dollars a foot from shell for easy math, on a good day in my market, and it will differ in California, New York, and elsewhere, they’ll expect the landlord to contribute fifty of that. For that, the landlord can ask for 10 years flat, right out of the gate; that’s the standard. Then maybe it’s 11 or 12 years if the tenant wants more. Then you can play with the lease rate, but you can’t increase it too much, because it won’t be underwritten that way and you can’t amortize everything. We all know that game.
It’s also going to mean competitively bidding contractors, because some had the forethought to stock up on materials and some didn’t, and some can deliver in a different timeframe than others. It’s going to take a lot of upfront legwork. Interview contractors, because some have been successful through the pandemic and some haven’t, and you don’t want to get stuck in the middle of a build-out unable to finish. Leases will probably go longer than ten years, but you need to raise enough capital to be competitive on tenant improvements to have a successful medical office building.
The Medical Office 1031 Exchange
Gordon Lamphere: One of the most underrated things brokers don’t talk about enough is a well-capitalized landlord, and we’re entering an environment where that matters more than ever. Toward the end of the interview, let’s talk exits. You have a reputation as an expert on exit strategies. Nobody likes paying taxes, wherever you sit on the political spectrum. Can you tell our viewers what a 1031 exchange is and how it factors into medical office investing?
Trisha Talbot: I help a lot of physicians maximize the value of their physician-owned property. When they come to me wanting to sell, I help them understand they need to put a long-term lease in place, and then they can sell to investors who are typically 1031 buyers. Those buyers are looking for investment properties to buy after they sell, to take advantage of the 1031 tax deferral. You have to be a little cautious, because they may have identified too many properties and put yours under contract and then not select it, though luckily I haven’t had that happen. They’re looking for quality tenants, and the first things they want to see are the lease and the financials. I’ve struggled with some physicians not wanting to release their practice financials. If the practice is strong enough, they don’t have to release their personals, depending on the buyer. But now I don’t go to market without practice financials. These investors are buying the cash flow, and they underwrite it based on their opinion of the tenant’s financial strength.
For the physicians or investors who sell and want to do a 1031, they can go into other investment properties. Some have wanted to go into the short-term rental market. Sometimes they sell and buy another property or two to put their practice in, or they’re buying another practice and putting that in. There are a variety of ways to use it if you’re selling and don’t want the tax hit on the proceeds, but it has to go into an investment property of some sort. What I tell physicians and investors is that the maximum value of your property is when the WALT is highest, or, for a physician-owned building, when you’re the tenant and you put a long-term lease on it. If you maximize the value that way, you can take the proceeds into other investment opportunities.
Gordon Lamphere: A great method for exiting and deferring tax. But there’s no free lunch. What are the risks and drawbacks you’ve seen in the 1031 process?
Trisha Talbot: Identifying a property. If you’re thinking of doing a 1031 and selling, have some properties in mind that you’re already looking at, because timing is everything. The sales cycle might be longer than expected. The buyer might need an extra 30 days to close, or something in due diligence needs to be fixed. Have a variety of potential properties you can strike on once the timeline is known. There’s the reverse 1031 exchange, which is a great opportunity to mitigate risk, but there’s always risk in selling. If you buy a property in a reverse exchange and your property doesn’t sell in the timeframe, that’s a risk. I’d say put the property on the market, get a sense of the activity, and have buckets of properties: ones you can move on immediately, ones you can move on in a couple of months, and ones that might take more time, so you have variety. The 1031 is a time-sensitive strategy for sure.
Gordon Lamphere: What are the time limits people worry about? A lot of investors tell us they want to 1031, and we have to say it isn’t plausible within their timeframe.
Trisha Talbot: You have 45 days to identify the property. From there, the timing changes with what you need, but the 45 days to identify is the big one. You have to have properties you can invest in within 45 days and realistically close on soon after. When you’re looking at investment properties and working with physicians, 45 days is not a lot of time to find properties, see if they’re viable, and negotiate with another broker or directly with an owner who has a life of their own. So if a 1031 is something you’re looking to do with the proceeds, start it as a parallel path with the sales process and time it appropriately.
The Final Four
Gordon Lamphere: Great advice. We’re running out of time, so let’s get to our Real Finds Final Four. First, one of the most important questions we ask: ten years from now, what will have changed most about the medical office industry, and what big-picture trends can our investors and real estate professionals expect over the next decade?
Trisha Talbot: Healthcare goes through cycles, and it started with HMOs. Right now the trend is private equity firms and hospitals buying medical practices, and physicians becoming employees. For older physicians, that’s been a great solution to the electronic medical records systems and the new regulations from the Affordable Care Act. But doctors get frustrated. If they’re younger, they have different ideas about operational speed and how things are done, and you can’t fight a big bureaucratic hospital or make those changes. So while practices are getting bought now, they typically have to stay employees for a certain time, and once that burns off, I see them breaking out into private practice again.
Gordon Lamphere: We’re seeing real diversification in who’s deciding to enter private practice and entrepreneurial business more broadly. Real estate is an entrepreneurial environment. If you could start your career over, what advice would you give young Trisha?
Trisha Talbot: I would have started a capital-raising real estate investment group immediately. Smaller buildings at first, then bigger buildings, and eventually a fund.
Gordon Lamphere: Everyone loves equity, at least when it’s good. I’d recommend that to all our listeners who’ve had successful careers: go start that fund. I work for a group with a large fund, and I love operating in a world where you can gain equity and create long-term generational wealth. For potential investors, take the leap of faith, because it’s never too soon. Third question: a business or real estate book that’s influenced your career.
Trisha Talbot: There are so many, but the one that’s stuck with me most is Simon Sinek’s Start With Why. He talks about how we all talk about what we do and how we do it, but we typically don’t talk about why. That’s something I’ve been working on. Why do I get up every day? Why am I so excited to come here? I was having dinner with my son yesterday. He did sports medicine in high school, and now that he’s looking at colleges, he wants to go into sports business. I asked why the change, and he said, I can’t stand the blood. If you can’t stand the blood, you can’t be successful in sports medicine. I said, that’s true, and that’s why I do what I do. I do not have the capability to operate on someone. Even giving someone a shot gives me fear and anxiety. But I can do the business side and help these people who are gifted in healing and in intricate procedures. I can help physicians help their patients on the business side. While some of them are well versed in it, do they have the time? Out of the 24 hours in a day, is their most valuable revenue-generating time on the business side, or in the clinic, so they can go home and have happy lives with their families instead of working as a clinician and then doing all the business work too?
Gordon Lamphere: Simon Sinek is a great influence on the business world and a great voice for asking why. We’d love to have him on the podcast; I’m not sure he’d come. Beyond Simon, who’s the next person who has influenced you in real estate that we should have on?
Trisha Talbot: Someone I really admire, though she’s very local to my market, is Sharon Harper from Plaza Companies. She’s a female medical office developer who created medical office in Phoenix, and I think nationally, as an industry. She’s an icon. She’s still married to the same man and raised five children. That’s incredibly impressive, because you’re always asking, am I going to work, or do I need to get home to my family? It’s a struggle. You think, if I just stay ten more minutes, and then you come racing in for dinner and nothing’s done. There’s always that pull. I’m sure she has stories about how challenging it was, but in the end, she did it. As we adjust to this new normal where we can do interviews on Zoom without flying to each other, and physicians can accept help and go home without thinking about it, we all have to think about how valuable our time is and where we want to spend it. For me, in real estate in my market, she’s somebody I admire, and we talk often. She’s a great person.
Gordon Lamphere: As somebody looking at having additional little ones in my life, I’d love to have her on for that alone. She sounds wonderful, and we’ll get her contact information. If folks want to reach out to you to learn more about medical office, the 1031 process, or how to work in the real estate industry, what’s the best way?
Trisha Talbot: The best way is the website, docproperties.com, where they can schedule a call with me in their time zone without exchanging twenty emails to figure out timing. If a time doesn’t work, email me at [email protected], and the phone number is on the website under contact. Everyone’s busy, and a lot of people like to text and email, so I offer the easy button, but you’re welcome to email or call directly. After a couple of rounds of exchanging voicemails, people get frustrated, so if you have your own method, feel free. All my contact information is easy to find.
Gordon Lamphere: Trisha, thank you so much for hopping on the podcast. We’ll have to have you on again to explain more about what’s going on in the market.
Trisha Talbot: Absolutely. Thank you for having me.
Gordon Lamphere: If you enjoyed the podcast, please give us a like, a five-star rating, or a review. Your comments, interactions, and subscriptions matter for the podcast algorithm and help us continue to get the guests our viewers want to listen to and learn from. You can follow us on YouTube, Spotify, and wherever you get your podcasts. I’m Gordon Lamphere with the Real Finds Podcast. Thank you for listening.
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