June 15, 2020
by Bob Zariczniak, HBSc, DDS
McDonald’s is famous for inventing (and continuously re-inventing) the fast-food industry. What most people don’t understand, however, is that the majority of their profits isn’t from the burger-flipping business, but from the commercial real estate business. Dentists, although known for drilling, filling, and billing, can learn a thing or two from this restaurant chain.
It is common knowledge that dentists are high-income earners, but while dentists have tremendous opportunity to build wealth in several ways, many times it is blown by making emotional and impulsive choices and being left with no money for large opportunities when they present themselves (think of ski trips, fancy cars, cottages, etc.) One of those opportunities is owning your own building.
One of the largest parts of any dental corporation’s expenses is monthly rent, which can range usually from $2,000 to $30,000 a month depending on the size, location, and pace of your practice. This is money every month that could potentially be put into your own building, or better put, your retirement. Although it would be an easy choice for every dentist to own their own building, owning or developing commercial real estate is easier said than done. Zoning issues, limited space, bureaucratic delay, large debt loads, as well as the risk of losing patients when moving are all considerations one must make before making such a decision.
Over the last 15 years, commercial real estate has reached dizzying highs. Buildings worth $1,000,000 on paper were selling at over $3,000,000 right before the pandemic took hold, and in the seller’s market of commercial real estate, landlords had a firm grip on their tenants to do pretty much whatever they pleased, so long as it didn’t exceed the boundaries of the lease too far. Landlords knew that for a dentist to move, it would be very difficult, and options would be very limited, especially in urban areas. For any retailer to move location, it would be simply a matter of packing up their equipment and products and relocating to any open space willing to rent. For dentists, the case has always been more difficult, with plumbing, mercury waste disposal, lead-insulated walls, proper disposal services and the like causing a halt to any decision to relocate. For years dentist tenants who were unhappy and wanted to move could not because of all these limitations, and landlords knew it. They could walk in and demand anything at will and knew they could get away with it because of the difficulty involved in dentists moving.
With the COVID Pandemic, a particular opportunity has presented itself to dentists. Overnight, what was a landlord’s dream and a seller’s market had turned itself upside down: after 2 weeks of March shutdown, only 25% of mall tenants were able to pay their rent, commercial retail property dropped 11%, and banks began to freeze lending for small and medium sized commercial real estate deals. Commercial retail was already ailing before COVID thanks to online shopping, in particular from the behemoth, Amazon. Major anchor tenants like Sears and JC Penny were already in trouble, and COVID helped expedite their demise, and the fall of the shopping mall concept in general, leaving more and more open commercial retail space, thereby decreasing the square-footage value.
Along with the drop in commercial retail value, businesses began to embrace allowing their employees to work from home, and reconsider big office spaces and having every staff member present there at the same time. Suddenly, people did not have to live close to work anymore as more and more would be done remotely. This will surely be a long-term trend to come, allowing big businesses to choose smaller spaces when leases are up in the near future.
With the decrease in demand and price for commercial retail space, the decrease in buyers because of lack of confidence in the industry, decrease in accessibility to loans from the banks for investors in the industry, and less tenants to fill space, dentists now are in a prime position to consider asking new lease terms with lower rates, buying out their building outright, leaving their lease early, or developing their own land and building in a better location for a better value. As Warren Buffet states, “Buy when there is blood in the streets”.
During the previous 15 years, lease renegotiations could be a nightmare experience for tenants, but if one were in such a process in the current period, they would find the tenant now finally holds the upper hand. Suddenly, the prospect of going to arbitration for resolving price of commercial square footage rate would undoubtedly benefit the tenant. Buying the building from a money-stricken landlord could be a common theme. The tenant could even negotiate a shorter lease and begin working on building a new development in this period. While banks are cautious to give out loans for commercial real estate to individuals purchasing for investment purposes, they very much favor and will still lend to dentists as tenants in their own building.
Many people are familiar with the stock market and the stories heard of how quickly riches can be gained by playing it (less often shared are the stories of loss). Commercial real estate, though not nearly as sexy or as talked about as the stock market, can be just as lucrative, if not more, especially if you are a tenant in the building. By owning your own building, not only do you put your rent money into an asset that you can control and let the inevitable rise of property value drive up the asset value ever more, a dentist could have total control over their clinic including signage, types of other tenants in the building, designated parking, etc. Not to mention the tax shelters that come with owning your own building.
When the stock market crashes, housing and commercial real estate are sure to follow, albeit many months later. The COVID crash occurred in March, and one can predict a more significant crash in housing and commercial properties to happen in late autumn. Dentists should take heed and prepare themselves for the purchase of a lifetime.
About the Author
Dr. Bogdan Zariczniak is a Hamilton Dentist who operates out of Stonehill Dental.