Posted on March 10, 2020
Are Clinics the Cure for What Ails America’s Shopping Malls? These Are The Top 6 Things CRE Stakeholders Need to Know About Medtail
Which has been more greatly exaggerated: reports of a retail apocalypse or a retail revival?
Brick-and-mortar store closures are an undeniable concern for big (and often overextended) brands such as Payless ShoeSource, Forever 21, Pier One, Victoria’s Secret, and others. On the other hand, in their search for growth opportunities, major retailers are increasingly responding to consumers’ health and wellness needs — and reaping benefits as a result.
In 2019 alone:
- Amazon began offering health insurance coverage via its Haven partnership with JP Morgan Chase and Berkshire Hathaway;
- CVS embarked on a nationwide expansion of its HealthHUB initiative;
- and Walmart opened branded health centers in both Atlanta and Dallas.
These last two examples are most relevant to anyone with an interest in commercial real estate (CRE). They point to an explosion of interest in medical retail, more popularly known as medtail. This rising trend in adaptive reuse is helping landlords make up for the departure of many long-standing tenants.
Case in point: late last year, Blue Cross Blue Shield of Texas announced that it would be partnering with Sanitas to care for underinsured and uninsured patients via 10 new clinics across Dallas and Houston. These clinics will focus on value-based primary and urgent care and occupy former retail spaces — for example, a storefront adjacent to a Lowe’s Home Improvement outlet in Richardson, one of Dallas’ first-ring suburbs.
What else do developers, brokers, lenders, and other CRE stakeholders need to know about medtail? Read on to learn why and how medtail will likely remain a market force to be reckoned with in 2020 and beyond.
1) Medtail recognizes that economic opportunity and community health are inextricably linked
It might seem self-evident, but environmental factors have an enormous impact on your well-being. That includes your zip code. Geographic data specific to food insecurity, employment rates, and transportation services combine to be a more telling indicator of a person’s health than his or her genetic code or preexisting conditions.
Ultimately, communities that are home to thriving local economies are healthier overall. In the words of The Pew Charitable Trusts, “efforts to attract business and commercial investment can improve the stability of local economies through job creation, an increased tax base, and enhanced access to necessary goods and services, which affect household income and health outcomes such as stress, chronic diseases, and mental health.”
Medtail represents something of an end-to-end — or holistic — solution in this respect. It makes those “necessary goods and services” more available to underserved populations while filling those vacancies that can contribute to the spread of urban blight. In short, medtail brings healthcare closer to where community members live, work, and shop. This is no small achievement given that approximately 40 million Americans lack what the Centers for Disease Control and Prevention classify as a “usual place” to obtain medical care.
2) Shopping malls and strip centers stand to benefit most from medtail
How have top-line shopping malls like Dallas’ NorthPark Center been so resilient in the age of eCommerce? By retaining their high-end and luxury retail tenants. Unfortunately, that simply hasn’t been an option for mid- and low-tier malls.
80s nostalgia may be all the rage, but department stores, long the anchors of suburban commerce, are no longer driving foot traffic as they did in their Reagan-era heyday. In 2018 (the year such figures were last collected), department store visits were down by approximately 10 percent. Meanwhile, industry experts predict that more than 1,000 department stores will be shuttered by 2023.
Enter medtail. Since 2017, mall leases for medical clinics have risen by almost 60 percent. By comparison, mall leases for apparel retailers have declined by more than 10 percent during that same period. The result has been a win-win. Landlords are happy to find new tenants willing to fill the sizable footprints left by departed department stores. And medical providers, whether they be general practitioners or specialists, get more bang for their buck — the “buck” being affordable rent, and the “bang” being access to a great deal of repurposable square footage.
3) Medtail can soothe providers’ pain points
Patients aren’t the only ones complaining about the rising cost of healthcare. Medical office building (MOB) space is expensive, and rents keeping inching upward to meet demand. Prices per square foot for this property type have hit all-time highs in the past three years, topping nearly $23 in some markets.
Moreover, as healthcare delivery methods continue to advance and diversify, provider expectations regarding desirable location, functionality, and amenities are evolving as well. Yet MOBs are notoriously difficult to renovate — especially structures built prior to the passage of the Americans with Disabilities Act (ADA) in 1990. As Richard E. Juge, CCIM, observes, because the industry has become increasingly consumer-driven, many MOBs may have outlived their usefulness. “While hospital inpatient use is declining,” he writes, “the healthcare industry as a whole is booming with new and different types of facilities: outpatient surgery centers, ambulatory care centers that provide sophisticated imaging procedures such as MRI and CT scanning, geriatric care centers, on-demand diagnostic care centers, primary outpatient service centers, and home healthcare delivery systems. As the industry continues to grow, it will need a greater number and variety of facilities to house these new services.”
Healthcare providers view medtail as an opportunity not only to bring in more patients but also as a chance to relieve themselves of the financial burden that operating in more traditional — and traditionally centralized — MOBs can impose.
4) Some service lines may be more suited to medtail than others
Clearly, not all medtail is created equal. Heath clinics and general practices offer communities the lifelong benefits of preventative care. But, from a CRE perspective, specialized service lines such as dialysis, urgent care, and outpatient services offer the highest capitalization rates (cap rates). According to research conducted by The Boulder Group, urgent care cap rates remain the highest at 7.25 percent. At the same time (through 2019), dialysis centers experienced the most significant bump, rising 15 basis points to 6.15 percent.
Whether operating out of a shopping mall or a single-tenant property, these specific service lines offer long-term, stable leases appealing to many property owners, neighboring businesses, and patients.
5) Ground-floor spaces are especially suited for medtail
Even within malls and shopping centers, location remains a deciding factor in whether or not a particular property is well-suited for medtail. Not as sexy as a new Apple store, an outpatient provider is unlikely to be the focal point of a retail hub. However, it’s also unlikely to be relegated to a second-floor corner far off the beaten track. Medtail is one of the few “internet-resistant” brick-and-mortar property types, and no matter how much self-diagnosing we might attempt via WebMD.
Accessible, ground-floor spaces offer convenience to patients, most notably those with mobility issues. They also increase area foot traffic and promote one-stop shopping. Landlords would be wise to consider these aspects of the customer/patient experience when vetting properties for their medtail potential.
6) Zoning may be an obstacle for medtail in some communities
As plug-and-play as medtail can be for existing locations, there are still ordinances, regulations, building codes, and occupancy requirements to consider. Experienced developers in this sector appreciate how much of due diligence is involved. However, players new to healthcare construction may need to enroll in a crash course in compliance.
For example, the law of the land in Beverly Hills, CA, imposes severe limitations on developers seeking to convert retail to medtail. In the Lone Star State, medical facilities must adhere to Rule §133.162 of the Texas Administrative Code. Landlords and potential tenants should also be prepared to work closely with local Chambers of Commerce and city councils, as well as respond to comments, questions, and concerns from the general public. Overcoming NIMBYism may pose serious challenges for any provider, but especially those specializing in mental health, addiction treatment, and recovery services.