Why Medical Office Reclassifies 33% vs Industrial 20%

The headline numbers

From Cost Seg Smart’s engine modeling of standardized configurations for each property class (modeled outcomes, not a sample of delivered studies), the median accelerated reclassification rates by commercial property class land at:

The range from multifamily at ~17% to medical office at 33% is a 15-percentage-point spread. On a $5M property, that’s the difference between $900K of accelerated depreciation and $1.6M. The driver isn’t engineering quality or aggressiveness — it’s the underlying physical composition of each property class.

What drives the spread

Three structural factors explain almost all of the variation:

1. Tenant fit-out density relative to total basis

The more of a property’s basis sits in tenant-facing finish (carpet, decorative partitions, dedicated tenant HVAC, specialty lighting, fixtures), the higher the 5-year personal property bucket. This is the dominant driver.

Medical office and restaurants have the highest tenant fit-out density per square foot. Exam-room casework, medical gas distribution, specialty plumbing, dedicated HVAC zones, lead shielding — every component is tenant-specific and classifies as 5-year. Kitchen equipment, exhaust systems, bar equipment, decorative finishes — same pattern in restaurants.

Office and multifamily have lower tenant fit-out density. Office tenant suites carry carpet, partitions, and dedicated HVAC, but the structural shell and base building services are a larger share of total basis. Multifamily structural shell (27.5-year residential rental class) is the largest single bucket; per-unit components are smaller in dollar terms.

Industrial has the lowest tenant fit-out density of all. Pure warehouse is mostly structural shell on slab. Even flex bay industrial — which has office buildout in the front — has the warehouse portion (60-80% of total square footage) carrying minimal accelerated components.

2. Site improvement intensity relative to building basis

The 15-year bucket — parking lots, sidewalks, site lighting, monument signs, landscaping — varies dramatically by property class.

Industrial has the largest 15-year share of basis (typically 12–14%) because of truck courts. A 425,000 SF distribution center’s truck court can run 8 acres of paving. The 15-year bucket alone often exceeds the 5-year bucket in industrial — the opposite pattern of medical office or restaurants.

Self-storage also has very large 15-year shares (typically 18–24%). Drive aisles, RV storage paving, perimeter fencing, security infrastructure, and site lighting dominate the asset. The 5-year bucket is small (no tenant fit-out beyond a rental office), but the 15-year bucket is enormous.

Office and mixed-use have moderate 15-year shares (8–12%). Surface parking and standard landscaping. Structured parking in mid-rise urban mixed-use is 39-year (or 27.5 if residential allocation applies), not 15-year — which is why urban mixed-use sometimes shows lower 15-year shares than suburban single-use.

Multifamily 15-year is modest (typically 7–9%). Surface parking, pool deck, sidewalks, ADA paths, landscaping. The pool shell itself is structural (27.5-year), but pool equipment is 5-year and pool deck is 15-year.

3. Era of construction and specialty system density

Newer construction (post-2010) tends to have higher accelerated reclassification rates than older construction. The reason: building codes, energy codes, and technology have driven up the specialty system density. Smart-building HVAC controls, dedicated IT infrastructure, LED specialty lighting, modern audio/visual systems — all of these are accelerated buckets that didn’t exist (or were minimal) in 1970s-era construction.

For older properties (pre-1990), reclassification rates trend toward the lower end of each property class’s IQR. For newer construction (post-2015), they trend toward the higher end.

Property-by-property breakdown

Medical office (33% median)

Medical office is the highest-reclassifying single-use commercial property type. The reasons stack:

• Specialty plumbing density: Medical gas piping (oxygen, vacuum, medical air), hand-wash stations, eye-wash, scrub sinks, dialysis water, dental chair plumbing. All 5-year.
• Specialty MEP: HEPA filtration, negative-pressure isolation rooms, dedicated specialty-zone HVAC, lead shielding in radiology suites, dedicated electrical for diagnostic equipment.
• Exam-room casework: Built into every clinical space. 5-year when removable (most cases).
• Specialty fixtures: Procedural lighting, exam lights, surgical lighting. 5-year.

Surgery centers and hospital outpatient departments reclassify in the mid-30s; primary care offices reclassify in the high-20s. The variance within “medical office” tracks specialty density.

Self-storage (34% median)

Self-storage is unusual among commercial property types because the 15-year bucket dominates rather than the 5-year. Drive aisle paving alone often clears 15% of basis. The roll-up door classification (defended as 5-year personal property under the permanence test) adds another 6–10%. The combination produces accelerated reclassification rates north of 30% routinely.

The story changes slightly for multi-story climate-controlled facilities. The added structural elements (elevators, multi-floor structural framing) increase the 39-year bucket. Reclassification rates run 28–34% for multi-story versus 32–38% for single-story drive-up.

Retail (32% median)

Retail’s reclassification is balanced between 5-year tenant fit-out (storefronts, decorative finishes, tenant HVAC) and 15-year site improvements (parking lots — typically the largest 15-year line in retail, plus pylon signage, site lighting). Neighborhood strip centers reclassify slightly higher than lifestyle centers because the proportion of tenant fit-out to structural shell is higher in the smaller format.

Restaurant (30% median)

Restaurants reclassify aggressively because nearly every component above the structural shell qualifies as accelerated. Kitchen equipment, exhaust systems, ventilation, bar equipment, refrigeration, decorative finishes — all 5-year. The 15-year bucket is smaller than retail because restaurant pads are typically smaller (less parking, less landscaping relative to building basis).

QSR (quick-service restaurants) sometimes reclassify lower than casual dining because the kitchen footprint is proportionally smaller. Destination restaurants reclassify highest because the bar, F&B, and decorative density is highest.

Hospitality (30% median)

Hotels are the FF&E-heaviest property type in the dataset. Guest-room furnishings, F&B equipment, spa equipment, fitness equipment, pool equipment, decorative finishes throughout. The 5-year bucket clears 22–28% routinely. The 15-year bucket is moderate (parking, porte-cochère, pool deck). Reclassification varies by format: select-service runs 26–30%, full-service 28–32%, upscale and resort run 32–38%.

Mixed-use (26% median)

Mixed-use is a blended property type — the reclassification reflects the use mix. A property that’s 30% ground-floor retail and 70% multifamily above will reclassify closer to multifamily (with the structural depreciating at 27.5 years if the 80% residential test under Section 168(e)(2)(A) is met). A property that’s 60% retail and 40% office above reclassifies closer to retail. The engineering analysis runs the inventory separately for each portion and reconciles.

Office (28% median)

Office sits in the middle of the spectrum. Tenant fit-out density is moderate (carpet, partitions, dedicated tenant HVAC, decorative lighting). Parking is meaningful but not industrial-scale. Class A trophy office reclassifies slightly lower than Class B suburban office because trophy buildings have more of the basis sitting in structural shell and curtain wall (39-year) — the per-tenant fit-out is a smaller share.

Industrial (20% median, widest IQR at 20–24% with logistics flex pulling the upper tail)

Industrial has the widest variance of any property class. Pure warehouse with under 5% office finish reclassifies in the high teens. Flex bay with 20–30% office finish reclassifies in the high 20s. Industrial-office with majority office reclassifies in the low 30s. The engineering classification of the property by subtype is the most consequential decision in an industrial study.

Multifamily 5+ (17% median)

Multifamily has the lowest accelerated reclassification of the commercial classes — but the comparison isn’t apples-to-apples. Multifamily structural depreciates at 27.5 years (residential rental class), not 39 years. The 18% accelerated bucket reclassifies into 5/7/15-year buckets out of the 27.5-year baseline. The remaining 82% depreciates over 27.5 years rather than 39. So the combined depreciation acceleration for multifamily — the difference between the engineered classification and the unsegregated straight-line — is competitive with commercial property despite the lower headline reclass percentage.

What these benchmarks are for (and what they’re not)

These modeled benchmarks are useful as a diagnostic for owners considering cost segregation. If you own a medical office building and a vendor projects a 22% accelerated reclassification, the projection is well below the modeled median (32.9%). Either the property has unusual characteristics (very old construction, minimal tenant fit-out, ground-floor only) or the vendor is being conservative to underpromise. Either way, the projection warrants investigation.

The benchmarks are not a substitute for a property-specific engineered analysis. Two retail centers with identical square footage and identical acquisition prices can reclassify materially differently — different anchor mix, different parking ratio, different decorative finish density, different construction era. Per-type interquartile ranges in the published dataset show the typical spread; individual properties land within and sometimes outside that range.

For a property-specific projection, schedule a scoping call. For the underlying dataset and methodology, see the benchmarks page and the methodology.