After the fifth interest rate hike in seven months, banks unwilling to sacrifice market share are lending money to medical doctors at pre-pandemic rates.
After the COVID-19 benefits like the CARES Act and EIDL expired, small business owners entered a stark new reality: a tough job market and interest rates that haven’t stopped climbing. Since March 2022, the Federal Reserve has increased its federal funds rate ten times, totaling five percentage points.
Uniquely, a handful of banks, unwilling to lose market share, are maintaining low rates for doctors. Generalists and specialists can qualify for interest rates as low as 5 percent, even after the recent hike. (For reference, 5 percent is almost as low as rates were a decade ago.)
Physicians hearing about this window of opportunity in the market for the first time may find the news a welcome surprise and a much easier onramp into the new economic realities post-COVID-19.
From March 2020 to January 2022, the Small Business Association suspended its usual fee and offered free payments on new and existing loans for six months. Despite low interest rates from banks at the time, the SBA offer was too good to pass up. Some doctors took the moonshot to launch ground-up projects and own their office real estate.
Then, after 21 months of giving free money away, the economic environment shifted swiftly. The cost of borrowing has doubled for developers, construction costs are up, wages increased, and the supply chain for equipment and materials continues to pose challenges.
Additionally, we haven’t seen the price of existing assets decrease to reflect the higher rate. Doctors and dentists considering a practice acquisition will likely find that the real estate is still out of reach, at least in Texas. The existing product remains valuable because developers don’t qualify for the same low rates as doctors to develop new projects; the margins just aren’t there to incentivize them to take the risk.
But with physicians able to access lower rates, doctors still have an incredible opportunity to move out of leasing and purchase real estate in the current environment.
Let’s say a physician knows they want to practice for another ten years at least and has a specific lease space in mind. Often, a letter of intent will result in paying more than $15,000 a month between the cost of the lease and build-out.
Instead, a sitting office condo or similar space can be negotiated with opportunistic pricing that didn’t exist nine or 12 months ago when the interest rate hikes paralyzed potential practice owners and others.
Some developers took risks and built projects with late 2021 pricing that remain empty. With how much money a potential developer invested in those projects and what needs to be recouped to make a deal, there is often an opportunity to run the numbers and negotiate down.
Pricing and several other significant terms for potential clients are on the table because of the developer’s urgency to sell.
In this environment, clients will be able to spread payments out over 20 years instead of five or seven, with tens of thousands in savings in all-in costs compared to lease options. With doctors needing to consider cash flow, the runway can be huge.
Physicians who go this route will also build equity with every single payment, own the real estate at the end of the life of the loan, and enjoy the appreciation that comes with the investment.
With high interest rates for other borrowers and small office rates that make sense, doctors have a unique opportunity. If a healthcare provider knows their patient base, wants to practice for at least ten more years and is positioned to put between 5 and 10 percent down, now is a solid time to invest in real estate for a clinic.
Thomas Allen is the CEO, co-founder, and transitions president of Texas-based Practice Real Estate Group. PRG now has principal offices in Austin, Boston, Dallas, Houston, and New York.