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Market Report: Dental Office Rental Rates on the Rise in 2014

Issue: Winter 2014
Jeremy D. Behar , Cirrus Consulting Group

The North American dental office leasing market, after several years of flat occupancy rates and minimal rental rate increases, is showing signs of expansion. The overall U.S. office vacancy rate dipped from 12.7% at mid-year 2012 to 12.1% as of June 30, 2013, and is projected to move downward over the next three years. Additionally, landlords point to strong demand for 2014 deals which may accelerate the decline in occupancy rates over the next six months.

In addition to this, the number of startup dental practices signing new leases across the US and Canada through the first half of 2013 was 16.8% higher than the same period in 2012, leading to more demand and shrinking the supply of space available.

What does this mean for the average dentist in the country today?
Research and data all point to landlords being more bullish over the next few quarters because their buildings have less vacancy than at any time over the past five years. The likelihood is, at the next renewal negotiation, landlords will be trying to push their net effective rental rates up to make up for years of modest rental rate and income growth.

As a guideline, rents in the average dental practice should be no more than 8-9% of total production. Unless production/revenue grows, the cost of rent as a percentage of practice production will increase. As a result, rents are becoming the second largest expense in a dental practice behind staff costs.

This graph illustrates rental savings for dentists who renewed their office leases in 2013 vs. 2016 and beyond. The ‘y’ axis represents rental rates, and the ‘x’ axis represents time over 8 years. The red line represents those who renewed in 2013, the blue line represents those who renew in 2014/2015, and the green line represents those who renew in 2016 and beyond.)
Sources: CoStar weekly economics updates; CBRE Quarterly Rental Rate Reports; Cirrus’ Dental Office Rental Archive System, 2013.

chart-table.jpg Market Report: Dental Office Rental Rates on the Rise in 2014

What Can a Dentist Do to Avoid Significant Rental Rate Increases?
Where dentists historically approached their landlords 3-9 months prior to the end of the lease, Cirrus consultants strongly recommend dental offices begin the renewal process two years (24 months) in advance of the end of term.

We have tracked this recommendation over the past two years and discovered a dentist could theoretically save more than $127,500 in rent over the next 6.3 years (average term commitment by dentists).

Cirrus Consulting Group is the North American leader in helping dentists grow and protect their practices by properly and effectively setting up their Dental Office Lease Agreements in a smart, efficient and strategic way.

To learn more about Cirrus Consulting
Group, visit www.cirrusconsultinggroup.com. To speak with one of the professionals at Cirrus about your practice and your lease agreement simply dial 1.800.459.3413 or e-mail us at info@cirrusconsultinggroup.com.