As consumerization pushes health systems closer and closer to their patients, we’re seeing healthcare emerge as an opportune tenant for retail landlords with big box vacancies.
“There’s been a big push by retail landlords to try and attract medical tenants to diversify their portfolios, many of which have been struggling to adapt to the changing nature of retail,” JLL Senior Vice President Sarah Cogswell said at a recent RE Journals’ event.
The challenge is catering to the specifics of healthcare tenants. Landlords are used to retailers that have their specs down to a science, a repeatable façade and the ability to take over a building and make it their own.
Medical office tenants do not typically have the bandwidth to study various sites to determine feasibility; they need guidance on how retail spaces can be effectively adapted for their business. While it wasn’t common practice historically, landlords should consider investing upfront to provide prospective tenants renderings of how spaces could be manipulated to better accommodate medical uses. For example, a cavernous big box may not seem well suited for healthcare at first glance. But with small changes like added windows and lighting, health systems may take a second look.
Another adjustment for retail landlords will be a willingness to reduce and restructure their underwritten rental rates, which are based on a traditional retail tenant. Reduced rents may seem counterintuitive, but it’s the right move to secure long-term, high-credit health system tenants and lock in lower cap rates when selling the asset down the road.
So will we start seeing more healthcare tenants in shopping malls? Maybe, but there are some underlying hurdles related to image and branding. Malls may offer captive foot traffic, but health systems typically prefer more exterior visibility. For now, expect strip centers and freestanding big boxes to be the primary beneficiaries of healthcare tenants.
“Clinics are getting smaller and more efficient, which enables health systems to roll out a greater number of outpatient facilities to meet their patients where they are,” Sarah said.
Given the continued growth of market forces incentivizing population health management and rewarding high quality outcomes, health systems will continue to take their services outside of the hospital and into the community. Retail vacancies will offer the strongest, most central locations within these hyper-local markets, as landlords and tenants meet in the middle to establish new practices around leasing and operations in this unconventional setting.