Commercial real estate industry insights.

A Matter of Opportunity: Healthcare and Retail Sectors Both Benefit from “Medtail”

by Jack Bass, II, MAI | Aug 15, 2019

“Healing is a matter of time,” Hippocrates wrote, “but it is sometimes also a matter of opportunity.”

As evidenced by the pox of vacant storefronts, American malls are ailing. Competition from e-commerce is largely to blame for store closures. Malls with no surviving anchor store are in mortal danger because anchor tenants draw shoppers and pay higher rents, and their absence makes a mall look forsaken. Emerging as a potential lifesaver by filling vacant spaces is the healthcare sector, which makes for a dandy metaphor: In come the healers to breathe new life into moribund malls and shopping centers. For both parties, it’s a matter of opportunity. Healthcare providers hurt by decreasing margins are looking to shift services to less costly locations, and certain retail formats meet cost requirements and have suitable physical features. At the same time, lessors are finding that healthcare tenants draw steady traffic.

This healthcare real estate development trend, dubbed “medtail,” answers the retail sector’s need for Internet-resistant tenants that can refill empty square footage and support remaining shops.

Medical tenants aren’t yet common in malls and shopping centers, but the idea of repositioning retail properties as mixed-use meccas is appealing to stakeholders including landlords and REITs. Due to advances in medical technology, many procedures that once required hospital stays are now performed on an outpatient basis. As a result, hospital systems are driving new construction by shifting services away from hospital campuses. To a lesser (but growing) degree, decentralization and other trends in the healthcare industry are driving adaptive reuse, or the process of retrofitting existing buildings—such as stores—for new uses. (After all, not all malls can be reborn as sets for TV shows.) Repurposing retail space is gaining traction as a healthcare facility strategy because it generally requires less capital and less time to get up and running. Abandoned or underutilized retail spaces are also conveniently located with good visibility and offer abundant parking and large, open floor spaces. A patient’s zip code is more predictive of health than his or her genetic code, and community blight could be a social determinant of health that healthcare systems could help address by reviving retail properties. (Malls in lower income areas do, in fact, have more vacancies than malls in affluent areas.)

Such symbiotic partnerships are taking shape all over. The nation’s biggest mall, Mall of America in Minneapolis, announced plans to open a 2,300-square-foot walk-in clinic in partnership with university and healthcare system physicians. The Dana-Farber Cancer Institute has plans for a 34,000-square-foot oncology and hematology outpatient facility in the Patriot Place shopping center in Foxborough, Massachusetts.

The adaptive reuse trend in healthcare real estate is not limited to malls. Apart from these sprawling properties sit standalone “big box” retail sites that have given up the ghost. These could also be converted to medical facilities, with some of the same benefits. In Goodyear, Arizona, the former Palm Valley Cinema will be converted to an outpatient facility for the Abrazo Community Health Network, housing internal medicine, imaging, pain management, wound care, and physical therapy services in the 50,000-square-foot space. A bank building in Waukegan, Illinois, is now an ambulatory care center.

Not all municipal governments allow medical tenants to mix with retailers in the same buildings. The City of Beverly Hills, for instance, explicitly forbids it, and zoning restrictions in other cities render it impractical if not impossible. But where medtail is taking hold, retail landlords are diversifying their tenant mix and healthcare providers are enhancing patient convenience—a healthy outcome for both parties.