A Cure for Ailing Retail Property

Shopping centers that open their doors to medical tenants may benefit

Jeff Green

Some of the most-profitable health-care businesses aren’t in the traditional venues of medical-office buildings and hospital campuses. Rather, they’re found in neighborhood shopping centers, sandwiched between sub shops, clothing stores, dry cleaners and the like.

It’s not just dentists, optometrists and those ubiquitous “doc in a box” clinics that are hanging shingles on retail spaces these days. Increasingly, imaging centers, blood-testing labs, physical-therapy firms, satellite medical clinics and many other businesses are inking long-term deals with retail landlords. In some cases, they are taking over entire centers.

Given the soft retail real estate leasing climate and the health-care industry’s growth, this kind of leasing activity is increasing. When working with retail developers or owners with medical tenants who are seeking new capital, mortgage brokers must be able to convey fully any tenant issues to lenders. The following eight issues are especially important when working with landlords who are more accustomed to leasing space to merchants and eateries than to medical-service companies.

1. Credit quality: Individual doctors may be great at treating patients but not so great at running a business. They may be slow to respond to landlords’ calls and concerns and even slower at paying their rents. By contrast, hospital groups and other sizable medical organizations typically have excellent credit ratings and can often afford to pay a premium rent above typical retail-tenant rents. Larger physician groups with business managers or other accessible point people may also fall into the “good-credit tenant” category.

2. Language gap: The retail and medical communities often have different terminologies, employ different leasing practices and have different expectations. Medical businesses typically use office brokers who seldom deal with retail landlords and who don’t always realize how retail venues operate, particularly regarding co-tenancy, parking and patronage access.

3. Complementary businesses: Retail landlords typically prefer well-patient businesses such as chiropractic and optical clinics that are patronized by mostly ambulatory patients. Cancer-treatment facilities, dialysis centers, lap-banding operations and addiction-treatment centers may not be the types of uses that other retail tenants accept. In some  instances, however, these medical tenants have taken over entire retail centers on a long-term lease, largely negating such  image issues.

4. Utility use: Logically, a radiology business will use more power, and a physical-rehabilitation center that uses hydrotherapy will use more water. The landlord should establish tenants’ utility needs from the get-go.

5. Tenant improvements: Because of medical tenants’ highly specialized nature, tenant-improvement costs are typically higher for them than for smaller retailers. For example, finish-out improvements in an ortho-dontic practice can range from $75 to $125 per square foot or greater, and a surgical center’s finish-out improvements can exceed $200 per square foot. In most instances, landlords shouldn’t be expected to pay more than a fraction of those tenant-improvement costs. Also, keep in mind that once a space is transformed to a medical use, it’s often more challenging to reconvert to traditional retail.

6. Parking and patient access: Parking in shopping centers is designed around retail use, not health-care use. Most medical uses have low-to-moderate patient flow, but larger blood-testing labs can run a high volume. On the plus side, access for disabled patients is typically easier at retail properties than office buildings.

7. Contractual landmines: Mortgage brokers must know what types of medical tenants can be excluded by center anchors and other occupants. For example, an urgent-care center was planned for a shopping complex where a national drugstore tenant occupied a pad site. At face value, the two uses seemed complementary, but the drugstore chain informed the landlord that it planned to roll out a program to station an on-call doctor or nurse at stores and would exercise its “exclusive rights” lease provision to block the urgent-care center’s use.

8. Location: Although medical tenants may want prime retail spaces for optimum market presence, a landlord may prefer to relegate them to a corner or a rear space to placate its visibility-minded retailers. Make sure your client works out any co-tenancy details.

Caveats aside, the pros for retail-center owners leasing space to medical businesses most often will outweigh the cons. A large amount of strategically located retail space has become available at reasonable terms that have not been seen for the past decade. Medical users can make great tenants for these open spaces.

For instance, some older shopping centers near urban hospitals have become willing to offer favorable terms to hospital organizations seeking large blocks of space and long-term leases. Such sites increase health-care access to more residents. In turn, some retail centers have been saved by such medical uses, resulting in the properties maintaining and even increasing their values.

As mortgage brokers know, presenting all the risks and the opportunities to clients and to lenders will not only help them package the clients’ loan submissions more appropriately, but it also will foster trust for future dealings and may lead to additional lines of business.

Jeff Green is president and CEO of Jeff Green Partners, a retail-feasibility consulting firm that provides comprehensive market analysis and strategic-planning services to the country’s leading retailers, commercial and retail real estate developers, and health-care facilities. Reach Green at (602) 795-8351 or jgreen@ jeffgreenpartners.com. For more information, visit www.jeffgreenpartners.com.