An aging population, consumer demand for convenience and increased competition among healthcare systems have made medical retail (or “medtail”) one of the hottest sub-sectors in healthcare real estate. Medtail refers to healthcare services delivered in a retail environment, often in shopping centers or strip malls. Examples include urgent care centers, imaging centers and physical therapy facilities, although spa, alternative care and veterinary services may also be categorized as medtail.
Low vacancy rates in most retail markets have pushed up demand (and rents) for medtail leases, especially in fast-growing markets and those with an aging population. Serving this niche—whether representing owners/landlords or tenants—requires an understanding of how this specialty differs from traditional retail.
Growth of Medtail
While medical retail is not new, there was a post-pandemic surge among urgent care centers, with chains like American Family Care, CareNow, Concentra, GoHealth and WellNow expanding into regions nationwide.
“Consumers wanted to avoid hospitals and long emergency room wait times,” says Michael Marchese, partner with Chilmark Commercial Real Estate in Morristown, N.J. “The convenience of retail medical services is very appealing,” he adds.
Respondents to JLL’s 2023 Patient Consumer Survey named location/proximity as the second most important factor for choosing a provider, following insurance coverage.
Kevin Hodge, CCIM, brokerage advisor with Rock Commercial Real Estate in York, Penn., agrees that convenience (think parking, extended hours and one-stop shopping) is a factor, but sees competition as the biggest driver of medtail.
“Large medical systems are increasingly competing with one another, and with competition comes the need to differentiate,” Hodge says. “Convenience and greater visibility make retail locations a logical place to stand out to consumers.”
Retail Response
Retail landlords value the stability of long-term leases common with medtail tenants. “Once established, these tenants are less likely to relocate due to the cost associated with moving specialized equipment and the importance of maintaining their patient base in a specific location,” Hodge says. “Also, they are typically very creditworthy.”
“A long-term tenant paying above market value due to costly build-out requirements adds value to a retail center,” says Marchese, who reports his retail landlords have inquired about acquiring medtail tenants.
Yet, there is a downside to medtail. “Putting medical providers into retail space generally takes much longer than non-medical tenants due to complex build-out needs, which might include gas and oxygen lines and specialized drainage,” he says. “It could take up to a year to construct the space, causing the landlord to lose a year of income.”
Further, the unique nature of medical services can make it difficult to create a cohesive tenant mix. “Traditional retail wants co-tenants that complement their business and repeatedly draw people to the space,” Marchese says. “An urgent care center is an occasional need, and the thought of customers who are ill coming to their stores is unappealing.”
Lease Negotiation
The landlord is mostly in the driver’s seat when negotiating medtail leases in the current market, according to Hodge. Even with a 10-to-15-year commitment, most landlords don’t want to assume the cost of necessary infrastructure to support a medtail tenant, but there are exceptions. “If the landlord plans to sell in the near term, it might be advantageous to put up more of the improvements and charge a much higher rent,” Hodge says.
Landlords who plan to hold a property long-term must also consider restoration. “Removing medical infrastructure at the end of the lease is costly,” Marchese says.
When negotiating, landlords have limited options, notes Marchese, citing an example of a 10,000-square-foot space with a $200-per-square-foot TI concession. “That’s $2 million, and most landlords don’t have that money to put into a space. Instead, the landlord might offer one-year free rent on a 20-year lease and seven months on a 15-year deal,” he says.
Developer Strategies
Marchese knows developers who have constructed medtail space on spec, anticipating market demand. “They will put in the necessary underground structure, investing up to 30%, banking on a medical tenant coming in,” Marchese says. “Before they begin, they do their research, ensuring municipal support and that there’s no need for a use variance.”
Hodge notes that medtail can help reposition a center. “If the center is no longer attracting traditional Class A retail, shifting to a medical service center may be a better strategy,” he says.
Tips for Working in Medtail
Understanding the local medtail market, including who might be coming in, is key to success in this niche. “Medical systems need to grow and frequently acquire independent practices to reach critical mass,” Hodge says. “A medical provider is either going to be an acquirer or an acquiree, so brokers need to understand where a client fits in the ecosystem, their needs and then highlight how a location meets those needs.”
When working with prospective tenants, Marchese stresses the importance of ensuring they have the financial resources beyond leasing fees to purchase the equipment and open their doors. “The last thing the landlord wants is the space to be 60% built, only to learn the tenant is out of money,” he says.
“When you work with a medical tenant, full disclosure on how long the process is likely to take is essential,” advises Marchese. “The expectation of finding a space and opening in six months is unrealistic. Finding and building out a medical location takes time, and if you need a use variance, you could be looking at a year or two.”
Hodge notes that most large medical systems employ in-house staff to manage at least some of their real estate interests. “Some do it wholly in-house, while others partner with a broker whose expertise aligns with the transaction,” Hodge says.
“I’ve seen a trend toward using national brokerage firms with medical specialists, but this is not necessarily beneficial to their interests,” says Hodge, citing an instance of a national broker from outside the market coming in to negotiate. “That played to the medical system’s detriment,” he adds. “The value of local knowledge is that it gives us comparative advantages when it comes to negotiating.”
