Rarely in commercial real estate do the stars align so perfectly as with the heightened appetite for retail space due to the explosive growth of physician groups, urgent care centers and other health services.
Amid robust medical spending, health care executives have reached a consensus that it is vital for medical professionals to be closer to their patients, especially the growing number needing services connected with aging.
The impact of growth in the industry on existing medical office space has been predictable. Vacancy rates have plunged, cap rates are dropping and values are beginning to soar. The prognosis is attracting increased capital by investors who are coming to appreciate the outlook for this sector.
For example, in its first foray into medical office investment Starwood Capital Group recently acquired 72 medical office buildings totaling about 4.1 million square feet for nearly $1.4 billion.
“ Demographic trends are clearly favorable in this sector combined with limited supply, long leases and long-term debt allowing us to lock-in on very high cash yield for the foreseeable future.’’ said Jeff DiModica, Starwood president.
As the momentum behind health care picks up steam, even the prospect of an overhaul in health care insurance leaves health care executives unfazed. That was the message at a Los Angeles real estate conference for health care in March.
This rising demand for a shrinking supply of available medical space and the desire for greater patient accessibilitycouldn’t have come at a better time for retail landlords battered by the shift in consumer buying patterns wrought by e-commerce. The struggle to keep malls and other retail developments relevant to the consumer never has been greater.
The good news for landlords is that strong health care spending, which has played a major role in the economic recovery and job growth, is forecast to continue although at a reduced rate. Health care occupations and industries are forecast to produce one in four new jobs through 2024, according to the U.S. Department of Labor. Additionally, new medical office construction costs have soared, reaching $550 per square foot.
Health care operations tend to be strong credit tenants with low default rates. They also sign longer leases than the average retail tenant and attract daytime traffic to the property.
For service providers in specialties such as radiology, dialysis and physical rehabilitation – which have grown in demand with the aging population – good retail locations can have clear advantages over traditional medical office buildings. Retail offers large floor plates and is easy to reach with five-to-one parking ratios, accessibility, and excellent visibility. Also, retail is low rise and parking is free.
Savvy retail landlords have learned that an urgent care facility requires about 5,000 square feet and a medical group needs about 10,000 square feet. An orthopedic group with in-house rehab services can take up to 20,000 square feet.
Many owners are beginning to think differently when an anchor like Sports Authority goes away. In addition to chasing a replacement retailer, there might be some medical groups looking for a share of a 40,000-square-foot block that can be carved up to suit. Additionally, it’s become almost a foregone conclusion that anytime a series of merchants can’t make a space work, a medical practice is likely to backfill it.
Retail landlords also can consider developing a freestanding medical building on their property along with a shared parking structure.
We’re currently working with two owners that are keen on signing long-term health care tenants. With one project, we’re looking at converting 20,000-square-foot food court, adjacent to a Wal-Mart, into medical space. In the other project, we’re marketing an 11,000-square-foot outparcel build-to-suit that the landlord is developing on a premier retail destination center. Now that they have Best Buy and Target as staples servicing the community, a medical development just makes sense for their last phase of development. One project has strong freeway visibility and both offer excellent signage, access to the community and free parking.
Improved skills and advances in technology along with changes in how patients are looking at health care are combining to change how health care is delivered. Fortunately, for health care providers and landlords that are struggling to retain tenants there are ample retail opportunities to meet current and future demand.
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