Retail Healthcare: The New Normal?
More frequently than ever, former retail spaces, including big box grocery stores, department stores, malls, and other large blocks of space, are being retrofitted and repurposed to accommodate health systems and physician practices. There are numerous elements contributing to this convergence of retail and healthcare real estate. First, it’s helpful to understand that most metropolitan areas are experiencing very low vacancy rates in traditional Medical Office Buildings (“MOB’s”). Continued consolidation among health systems and physician practices, and their need to provide more outpatient services to accommodate the increasing number of insured people and aging populations, is putting pressure on existing MOB’s to be able to accommodate this growth. Large blocks of space in existing MOB’s are becoming more difficult to find, and many of the existing MOB’s that do have sizeable space have become functionally obsolete in today’s healthcare environment. Layer on top of that, the continual rise in construction costs and lack of affordable land in the desired areas, and it makes the cost of developing new MOB’s very expensive in most cases.
Many factors make converting former retail spaces to medical office an attractive option for commercial property owners. Typically, retail centers and shopping malls are located on or near main corridors with high traffic counts, easy access and great visibility. They usually have an abundance of parking. Retail centers and MOB’s have historically required similarly high parking ratios, unlike general office buildings that typically require less parking per square foot. Signage and branding opportunities are favorable in retail centers, which is becoming increasingly important to healthcare providers as they continue to fight for market share. Speed to market is a very important factor as healthcare providers seek to grow market share. Repurposing non-medical facilities to healthcare uses generally have shorter delivery times than new construction and can accelerate a healthcare provider’s speed to market. Perhaps most importantly, due to record high construction costs, shuttered big box retail spaces generally have lease rates that are lower than what could otherwise be offered in a newly constructed MOB. Add all of these factors up, and you can begin to understand why you are seeing more medical uses moving into your local retail centers.
A recent example of this type of conversion is Terraces Medical Plaza in Pineville, North Carolina. An investment group acquired a strip center formerly anchored by a 45,000 square foot grocer. The center is located directly across from a main hospital campus and provides a proximity to the hospital that is competitive with many of the MOB’s in the area. While some retail tenants remain in the center, an orthopedic practice has been identified to lease 20,000 square feet of the space. Flagship Healthcare Properties, leasing agent for the project, is focused on identifying other medical practices to absorb the remaining 25,000 square foot block of space.
Healthcare providers are also interested in smaller footprints to fulfill their population health management strategies while capturing market share. Healthcare providers are compelled to be in more retail locations in order to meet consumers’ demand for convenience. Converting former bank branches, car dealerships, auto care centers, mattress stores and other smaller retail facilities allows healthcare providers to expand their urgent care, primary care, wellness and other ambulatory services throughout their markets.
One example of this smaller-footprint conversion from retail to healthcare, is a redevelopment project in Blowing Rock, North Carolina. In this area of western North Carolina, new buildable sites are rare and land prices are high – especially along one of the few commercial corridors. The Blowing Rock Medical Park project converted a former upscale home furnishings retail space to a combined Primary/Urgent Care use. An adjacent land parcel was purchased from a separate landowner to provide additional parking, meeting healthcare use parking ratio requirements. Prior to the project’s completion, area residents had to drive 20 minutes to the nearest urgent care facility.
As we continue to see more retailers shutter their storefronts – big and small due to the Amazon effect, it will provide additional creative opportunities to accommodate growth strategies for healthcare providers. Overall, we expect to see this trend of retail healthcare for many years to come.