For children, and more than a few adults, the mere thought of the dentist might inspire apprehension or even outright dread. But for building owners these days, a dentist’s office never seemed so heavenly.
Faced with stubbornly high vacancy rates and depressed commercial property values, developers and landlords are furiously courting dentists, offering generous leases and reduced rents, and even paying for expensive capital improvements. As a result, dentists suddenly are gaining access to some of the best locations in the Twin Cities region.
The market “is the most advantageous for dentists as I have ever seen it,” said Tom Junnila, president of Junnila Company Inc. in St. Louis Park, Minnesota. He has been advising dentists for nearly 20 years.
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For example, Junnila recently negotiated a deal on behalf of a suburban dental clinic in which the Class A building owner offered to pay $110,000 for property improvements and six months of free rent worth about $38,000.
Another landlord seeking to renew a dental lease agreed to cut his original proposed rent by 15 percent, Junnila said. The dentist also received one 10-year lease with two five-year options, terms unthinkable just a few years ago, he said.
The Twin Cities real estate market remains sluggish. For the first six months of this year, the overall office vacancy rate hit a 19-year high of nearly 20 percent, though the growth rate seems to be slowing, according to report by NorthMarq Capital, a commercial real estate firm based in Bloomington, Minnesota.
By contrast, the vacancy for medical offices, including dentists, was just 11.5 percent, the report said.
Experts say dentists are desirable for a few reasons: dentists pay their bills on time and they stay at one location for long periods of time, perhaps up to 20 years — precisely the kind of stability that building owners crave in the current economic environment.
In 2009, Americans spent an average of $344.40 per household on dental services, more than any other healthcare product or service with the exception of pharmaceuticals, according to ESRI Business Analyst Online, an Internet-based service that uses global positioning systems to track demographic, consumer and business data.
In Minnesota, households paid $384.56 for dental services, about 12 percent more than the national average. Those numbers suggest dentists can weather a weak economy better than most healthcare providers.
And dentists often serve generations of families within a small geographic area they almost never leave, experts say.
Until now. The weak market is presenting dentists with unprecedented opportunities, Junnila said.
Take Eric Ness. He has operated Anoka Ramsay Dental on the outskirts of Ramsay for nearly 20 years but had been seeking a larger location. The owner of a business condo offered to sell the space to Ness for 25 percent less than he originally sought.
In the end, Ness purchased a foreclosed, bank-owned building closer to the center of town, which will double the size of his clinic to 3,000 square feet. He paid $460,000, about 20 percent less than the listed sale price of $580,000.
“What was financially impossible five years ago is now doable,” Ness said.
Retail locations, once financially off limits to dentists, are now welcoming them with open arms, especially suburban neighborhood centers, said Steve Brown, a NorthMarq senior vice president and managing director of the firm’s healthcare advisory practice.
The Twin Cities retail vacancy rate continues to grow, to 10.4 percent during the first half of 2010, according to the NorthMarq report. About 7 million square feet of retail space currently sits vacant.
“Most dentists have traditionally not been able to afford a retail environment,” Brown said. “But given the struggles in the retain environment, retail landlords are saying ‘We would like to have some stability.'”
By relocating to more visible retail locations, dentists are also becoming more brand savvy, designing signage and company logos, he said.
However, if the economy improves rapidly, dentists who sign long-term leases might be vulnerable to large rent increases, he said.
But for now, that does not seem to be a problem.
“It’s one of the bests time to build in the last 10 years,” said Roger Swagger, president of Karkela Construction in St. Louis Park, Minnesota, who specializes in dental clinics. Dentists should be one of the most desirable tenants. They have such a low failure rate.”
