MidwestHealthcare A healthy market: Medical retail opportunities flying off the shelves Todd Sachse and Ron Henry March 11, 2020 Share on Facebook Share on Twitter Share on LinkedIn Share via email With demographic and social shifts fueling dramatic and ongoing growth in the healthcare industry, the need for accessible and high-quality healthcare continues to rise. Healthcare spending is the fastest growing segment of the economy, expecting to exceed $6 trillion by 2027. With demographics comes dollars. And with dollars comes development. Healthcare systems are actively looking to identify and capitalize on new real estate opportunities, accelerating the trend of medical uses in traditional retail environments. From clinical services to laboratory uses and ambulatory/outpatient facilities, medical retail is on the rise. Why is this happening now? Which healthcare uses are moving aggressively and successfully into retail environments? How are those deals structured? Let’s explore the challenges, opportunities, and industry-specific operational nuances that need to be considered when building or leasing retail spaces to healthcare tenants. Why now? There are additional pressures driving the expansion of medical uses in traditional retail environments beyond healthcare industry expansion. Larger hospitals and healthcare systems are recognizing that they need to increase their market share in a competitive industry. One of the most impactful (and cost-effective) ways to do that is to reach out through an ambulatory/outpatient expansion connected to the retail experience. Moving some services from the hospital/campus to the neighborhood center frees up valuable square footage in crowded hospitals—where space is almost always at a premium. The construction that takes place in and around the hospital is much more expensive and constrained by regulatory requirements, therefore, expanding outside the hospital makes both logistical and financial sense. The increased accessibility and convenience for patients is appealing. Landlords are attracted to the economic stability of complementary service tenants that are increasingly backed by the institutional and financial solidity of larger hospitals and healthcare networks. Essentially, healthcare is simply another service retail offering, with a diverse range of different formats and service offerings. Some medical retail tenants can thrive individually, while others work better as part of a complementary group of tenants, but almost all are relatively immune to recessionary pressures and often open to signing longer-term leases. Both attributes are obviously appealing to owners and developers. Categories and services What specific types of healthcare uses are expanding most aggressively into retail environments? Pharmacies have long been a familiar feature on the retail landscape, but in recent years, urgent care has been particularly active in the push to move into retail spaces. A combination of patient convenience, and a push from healthcare providers to get more patients out of the emergency room and into the lower-cost environment of an urgent care setting, makes this a win-win for patients and providers. Another noteworthy trend is the increase in radiology space in retail environments. Radiology procedures are becoming much more mobile and easier to build into non-traditional medical spaces. Outpatient surgery is quickly becoming the new ‘anchor tenant’ many retail developments are based upon, bringing a large customer base requiring numerous ancillary services and collocated medical uses including the aforementioned radiology, pharmacy and clinics that can become robust campuses in and of themselves. Finally, while many primary care service providers have long been located outside of big medical campuses, more and more primary care services are being integrated into these types of retail settings. Flu shots, immunizations, and quick checkups are now available at many pharmacies and iconic convenience retail brands. Deals and developments Healthcare uses in retail environments generally fall into one of two categories: they can either move into an existing retail environment, or they can build their own facility and add a modest amount of other retail around it. Other uses typically include a pharmacy, small convenience/general store, durable medical equipment provider or perhaps a coffee shop. In the recent past, healthcare systems were the owner and builder of most of these medical retail facilities. Today, the growing push to keep costs down is driving a significant trend toward finding a developer to build the facility and lease it back to the network in a long-term lease arrangement instead of a traditional ownership structure. Regulatory mandates often make it particularly advantageous for a third-party developer to own and lease the space to providers, rather than the health system owning the facility and leasing it directly. One exciting opportunity we will likely see more of in the future is for medical facilities to move into repurposed department stores and other big-box tenants in malls. With built-in advantages of parking, favorable location and complementary amenities, it wouldn’t be surprising to see this become more popular and prevalent. Naturally, traditional retailers are attracted to these centers that may be the vision for repositioning a stale asset in a one’s real estate portfolio. Challenges and complexities Despite the many synergies and savings of integrating healthcare into retail spaces, challenges remain. Some facilities have a large daytime parking demand, which can be a burden for some retail projects. There may be extra costs or complications associated with accommodating large or specialized medical equipment, like a mobile MRI. Renovation costs can also be significant in older facilities, as some spaces require upgrading materials and finishes to be compliant with healthcare guidelines and regulations. Another issue that needs to be addressed going forward is the often unnecessary higher expense associated with healthcare construction. Simply putting a “medical grade” label on parts and materials can drive up costs. Economically, it makes sense to work with developers and construction professionals who have experience in this space and can utilize creative ways to keep costs down and deliver quality at a cost-effective price tag. The demand for new and expanded healthcare services and facilities continues to grow. With an industry evolving so quickly, flexible medical spaces that can accommodate multiple uses and equipment and operational demands are on the rise—a trend that mirrors the larger expansion of healthcare into traditional retail environments. While challenges remain, the combination of a dynamic and expanding healthcare industry and a retail landscape eager to embrace new formats and formulas for success means that the growth of medical retail isn’t likely to slow down anytime soon. Todd Sachse and Ron Henry serve as CEO and Senior Vice President of Sachse Construction, a Detroit-based construction management firm. For more information, visit www.sachseconstruction.com.