The Building Most Buyers Skip

Lenders weigh the weighted average lease term (WALT) heavily when they size loans, and buyers price on in-place cash flow and pay little for vacancy, according to market participants we speak with. A building with a WALT of three to five years therefore draws fewer bids and trades at a higher cap rate than the same building with long leases.

A lease expiring is not the same as a tenant leaving. Healthcare Realty reported 88.5% tenant retention in the second quarter of 2026, with 4.8% cash leasing spreads (Healthcare Realty, July 2026). Healthpeak management cited 80% outpatient medical retention and 5% cash re-leasing spreads (Healthpeak earnings call, August 2026). Each company defines retention its own way, and no industry-wide retention rate is published, so these are indicators, not benchmarks.

JLL reports that rents in new medical outpatient construction run above $40 per square foot, nearly twice the mid-$20s average for existing space (JLL, March 2026). CBRE puts the national average asking rent at a record $25.46 (CBRE, August 2026).

Construction costs explain the gap. All-in fit-out for medical outpatient space alone averaged $412 per square foot in 2026 (JLL via HCO News, March 2026). The average medical outpatient building sold for $307 per square foot in the second quarter of 2026, against its $374 peak in the third quarter of 2022 (CBRE, August 2026).

An existing building bought below replacement cost competes at rents new construction cannot match. Jeff Axley, Managing Principal, Ridgeline Capital Partners, describes the logic: "We're going in, we're buying it to a discount to current construction costs. That allows us to buy, you know, at a basis that frankly allows us to underwrite rents below new construction."

The argument has a limit. Inflated construction costs flatter any discount to replacement cost. The stricter test compares the going-in basis with post-COVID sales comparables and checks the trended, stabilized yield on cost.

The profile is specific: a building about 20 years old, occupancy in the mid-to-upper 80s, a WALT of three to five years, and rents below market. The work is light, not heavy.

First, refresh the lobbies and corridors, which in older buildings need attention. Second, make vacant space move-in ready: white-boxing a suite, or building a speculative suite, shortens lease-up for physicians who find it hard to picture a raw shell. Third, mark rents to market at renewal. With new construction asking above $40 per square foot, tenants paying below-market rent have little reason to move.

The best sellers are owners whose problem is the ownership, not the building: funds nearing the end of their life, partnerships with mismatched timelines, and long-time owners ready to move on. Market participants report that many sales today are driven by fund deadlines, not the sponsor's choice.

The plan aims to create value through leasing, not through the market. CBRE projects national rent growth of 1.3% in 2026 (CBRE projection, August 2026), while new leases commonly carry 3% annual escalators (JLL, March 2026).

The main risk in a short-lease building is that tenants leave when their leases roll. Clinical tenants with heavy build-outs and established patient bases rarely move. Non-clinical tenants are different: administrative space behaves like commodity office and moves on price, so its share of the rent roll should be limited. Tenant interviews inform the renewal estimate. They do not guarantee a renewal.

The second risk is the building. A standard property condition assessment is a starting point, not an answer. Jeff's warning about generalist inspections: "They're not really doing the deep dive. ... Get a roofer look at the roof and identify anything." Trade specialists for the roof, HVAC and foundation, a walk with a building engineer, and a larger capital reserve than was customary five years ago reduce surprises after closing.

MARKET SIGNALS

New space costs nearly twice as much. New medical outpatient construction rents run above $40 per square foot, against a mid-$20s average for existing buildings (JLL, March 2026).

Pricing is below its peak. The average medical outpatient building sold for $307 per square foot in 2Q 2026, against a $374 peak in 3Q 2022 (CBRE, August 2026).

Tenants renew at higher rents. Healthcare Realty reported 88.5% tenant retention and 4.8% cash leasing spreads in 2Q 2026 (Healthcare Realty, July 2026).

WALT is the weighted average lease term, and lenders weigh it heavily when they size loans, according to market participants we speak with. A medical outpatient building (MOB) with a WALT of three to five years draws fewer bids and trades at a higher cap rate than the same building with long leases in place.

New medical outpatient construction rents run above $40 per square foot, nearly twice the mid-$20s average for existing space (JLL, March 2026). CBRE puts the national average asking rent at a record $25.46 (CBRE, August 2026). With new construction asking above $40 per square foot, tenants paying below-market rent have little reason to move.

A lease expiring is not the same as a tenant leaving. Healthcare Realty reported 88.5% tenant retention in the second quarter of 2026, with 4.8% cash leasing spreads (Healthcare Realty, July 2026). Clinical tenants with heavy build-outs and established patient bases rarely move, while administrative space behaves like commodity office and moves on price.

An older medical outpatient building needs more than a standard property condition assessment, which is a starting point, not an answer. Trade specialists for the roof, HVAC and foundation, a walk with a building engineer, and a larger capital reserve than was customary five years ago reduce surprises after closing. Tenant interviews inform the renewal estimate.

For informational purposes only. Not an offer to sell or a solicitation of an offer to buy any security; any offer is made only through confidential offering documents. Projections are not guarantees of future results.