Savvy brokers find the right property prescription for specialized medical tenants.
When southeastern grocery
store chain Ingles Markets needed help subletting its
32,000-square-foot box in an ailing strip center, the prognosis for
leasing to another retail tenant didn't look good. But John D. Spake,
CCIM, president of Spake Real Estate in Asheville, N.C., provided a
prescription for improved health: He leased the space to Pardee
Hospital , which wanted to consolidate its urgent care, physical
therapy, and imaging services in one location.
done a lot of alternative uses for grocery stores because in smaller
markets, there's no retailer to back-fill the boxes. In my opinion,
[health care] is one of the more high-quality uses," Spake says. After
originally inquiring about another building, the hospital ended up
signing a seven-year lease in the strip center with 11 five-year
Customer Service Focus
Leasing nontraditional locations to specialized medical tenants is a
popular response to the health-care industry's current robust expansion
trend. As hospitals add beds and specific treatment centers move off
medical campuses, health-care tenants are focusing more on customer
service and broadening their site selection parameters, such as looking
for locations with more parking and access to major roads.
which have many service lines and often own medical practices within a
community, are leading the way with this style of outreach marketing.
But other providers, including independent physicians and growing
health-care businesses, are employing the strategy as well. "They're
trying to get closer to where the people reside," says Richard J. Abel,
CCIM, vice president of Colliers International's health-care services
group in Cleveland . "It's a riskier real estate investment though,
because medical campuses are pretty safe bets."
health-care providers have decided it's worth the gamble. The number of
diagnostic imaging centers, for example, has grown from 3,337 in 2000
to 5,771 in 2004, a nearly 73 percent jump, according to Verispan, a
health-care information company in Yardley, Pa. Outpatient surgery
centers increased nearly 21 percent, from 3,270 in 2000 to 3,955 in
2004, while cancer centers increased more than 36 percent, from 950 in
2000 to 1,296 in 2004. Dialysis centers increased about 11 percent,
from 4,112 in 2000 to 4,580 this year.
physicians also want to own rather than lease medical office space. Low
interest rates coupled with declining reimbursement rates and rising
insurance costs makes real estate a healthy investment option. Larry E.
Willey, CCIM, recently formed Weston Partners in Atlanta to capitalize
on this trend. The group purchased a 9,000-sf single medical tenant
building in Asheville and is redeveloping it into a multitenant office
center, with plans to offer interested physicians purchase, lease, or
lease-to-buy financing options. "We formed the company because we saw a
trend of physicians wanting ownership interest," Willey says.
other markets, commercial real estate professionals are finding
specialized health-care tenants a cure for what ails their local retail
economy. Sometimes it takes convincing clients to agree to the idea,
but the advantages for both landlords and tenants make the two a
logical fit, real estate experts say.
Retail-Style Site Selection
In today's profit-centered environment, medical practices and hospitals -- like retailers -- pay close attention to demographics and traffic flow
when formulating their expansion plans. They tend to seek rapidly
growing areas such as new, remote bedroom communities to establish
outpatient facilities or outpost-style clinics as a way to draw
patients into hospitals or larger physician groups.
providers also venture away from medical campuses in search of a key
target demographic: mothers and wives, families' primary health-care
decision makers. By placing themselves in the path of a person's weekly
routine, doctors and clinics hope to put the convenience factor to work
in their favor. "You pick sites that are more in line with everyday
living. You try to think about the route of travel, like grocery stores
and dry cleaners," says Brad Barker, a Dallas-based senior vice
president in the health-care sector for RTKL, a planning and
convenience, health-care facilities also look for exposure and access.
Harry Jewett, CCIM, vice president of health care for Lauth Property
Group in Denver , recently located a hospital on a 30-acre portion of a
600-acre mixed-use development. Along with the hospital, the project
includes restaurants, retail shops, office space, and multifamily
housing and is located off a major highway interchange near Denver.
hospital's site selection strategy was consistent with the way
retailers choose their locations. "There's a lot more emphasis placed
on customer service and ease of access for patients. The traditional
methodology was to build the institutions near the middle of town and
make people come to them," Jewett says.
various retailers, medical specialties have different site selection
needs. For example, while an imaging center might require the
visibility of a free-standing location, destination services such as
physical therapy, dialysis, dentists, and some physicians' offices are
good fits in strip malls. Less reliant on ancillary traffic, such
tenants may be satisfied with interior strip center locations because
they offer more exposure than a traditional third-floor suite in a
medical office building with no external signage. Retail centers also
provide higher parking ratios, around five spaces per 1,000 sf of space
versus standard office buildings' three per 1,000 sf ratio.
Because they don't rely on other users for business traffic, medical
tenants are a good fit when a center has lost its retail strength. An
established dermatologist or a dialysis center has a steady patient
flow regardless of what's next door. At the same time, retailers in a
substantially dark center may benefit from the increased traffic a
medical tenant provides. This trickle-down effect can breathe new life
into a retail location as patients and those who accompany them look
for diversions just outside the office waiting room.
tenants usually are good credit risks and sign longer leases to
amortize build-out costs over a longer time period. A medical lease may
be between seven and 10 years, double the typical retail lease. "Part
of it goes back to the loans. The lender wants the payment to be
manageable," says Jan Friedlander, CCIM, senior vice president for
Coldwell Banker Commercial R.E.S.I. in Denver .
course, landlords can charge higher rents if they pick up the tab on
build-outs, and medical space, which requires more renovation to
accommodate plumbing, electrical, and technology needs, often commands
higher lease rates. Paul McArthur, CCIM, president of Trillium Realty
Advisors in Hopewell, N.J., says his investment group bought an
obsolete center and partnered with a local hospital to purchase the
space slated for medical use. After a $9 million renovation, McArthur
now charges about $16.50 per square foot triple net for medical tenants
and about $12 psf triple net for retail. Rates depend on the market,
and on the medical side, rental rates depend on who pays for the
fit-out," he says.
Issues to Consider
While medical tenants are a good fit for many struggling retail locations,
there are still points to negotiate. Medical tenants often want prime
visibility in malls, while landlords would prefer to put them upstairs,
off the beaten path. "They try to reserve the lower space for the
higher-paying tenants," says John Carrick, managing director of Julien
J. Studley in Los Angeles . At the same time, physicians or dentists
don't want to be stuck next to low-rent tenants. "It affects the
health-care provider's image to be next to a nail salon on the second
floor," Carrick adds.
A medical tenant
may land a higher-visibility, first-level location, but those spaces
are usually small -- between 2,500 and 3,500 sf -- and shaped like
bowling alleys. Tenants who opt for the first-floor space may find
themselves wedged between two retail tenants with little chance for
Even though landlords can
charge higher rents once they renovate the space to accommodate medical
or dental uses, most transfer final tenant improvement costs to
tenants. In health care, that can get expensive; TI costs for dental
practices run an average of $100 psf, while costs for medical
businesses can vary drastically, Friedlander says. A family physician
practice might only see build-out costs of $40 psf, but a surgery
center may be looking at $200 psf, she says.
without assuming TI costs, landlords make a substantial commitment by
renting retail space to medical tenants. Because of the work involved
in developing the space, a suite renovated for medical use isn't a
prime candidate for many different uses later. "It won't change from a
restaurant to a bank to a medical office and back to a restaurant,"
Carrick says. Landlords also may face the need for extra security
during the early morning hours when the facility is open and strained
parking in the evening as patients and shoppers compete for close-in
But when retail options are
limited, income trumps nuisance concerns or future uses any day. "Some
places haven't been able to fill their needs as retail," Abel says. "Having health care in there instead isn't a bad deal."