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Just What the Doctor Ordered: 'Medtail’ Firms Filling Vacant Shopping Center Space

Changing Medical Economics Prompting Caregivers to Offer Services Where Patients Shop
April 9, 2014
The $65 million Cornerstone Medical Center in Atlanta, being built on a former strip center site, is an example of an emerging trend in MOB development.
The $65 million Cornerstone Medical Center in Atlanta, being built on a former strip center site, is an example of an emerging trend in MOB development.
With the era of retail medicine fast approaching, health care providers and medical specialists are increasingly opening facilities in shopping centers, which offer an attractive combination lower-cost space, convenient access for patients and ample parking.

“We’re seeing a lot of strip centers being converted to medical offices of various sizes, if a dollar store or grovery store goes out," Robert Moon, vice president, brokerage services, for Farmington Hills, MI-based Friedman Integrated Real Estate Solutions, tells CoStar News. "New MOBs can cost upwards of $200 a foot to development -- those are big numbers. Existing space at a retail center will be substantrially less than that, so there’s a big incentive to take that space rather than building from the ground up."

Stores left vacant by the demise of big-box retailers and struggling strip centers are turning out to be reasonably priced options for many health care facilities which are increasingly moving away from the centralized service delivery model centered on a traditional hospital campus and trending toward mixed-use properties where medical office buildings (MOBs) and retail stores and restaurants co-exist, according to Laura Lee Garrett, a partner with Hirschler Fleischer in Richmond, VA, and member of the firm’s real estate and retail practice group.

One of the latest examples of that trend was last month’s announced joint venture between Cornerstone Development Partners and Stein Investment Group to develop a $65 million mixed-use complex on four parcels that include a blighted strip center property at Collier and Peachtree Road in Atlanta.

The Cornerstone Medical Center will consist of 145,000 square feet of medical office space across from Piedmont Hospital and 16,000 square feet of street level retail and restaurants. Chick-fil-A has already agreed to a lease on the ground floor of the seven story building slated to break ground this summer and be completed in 2015.

"The catalyst for this project was the medical community's current demand for efficient, 21st century medical space. There's very little medical office space left in the area immediately surrounding Piedmont Hospital," said Jason Linscott, principal at Stein Investment Group.

Repurposing Readily Available Retail Space Vs. Moving Dirt

While medical office still accounts for 25% of all U.S. office space under construction, ground-up construction has decreased in recent years, in part because of the efficiencies available from converting non-traditional properties, especially big-box stores and suburban shopping centers.

Retail properties increasingly are being repurposed for medical uses as providers look to move closer to patients and reduce costs by providing outpatient services in non-acute settings, said Colliers National Office Research Manager Andrea Cross, who authored the global brokerage firm's recent 2014 outlook for medical office space.

"High retail vacancy, particularly in the suburbs, due to overbuilding prior to the recession and housing crisis, and increasing online retail sales have created opportunities for health care tenants," Cross said.

Well-located big box properties in the 20,000-to-50,000 square-foot range with ample parking, such as those occupied by defunct tenants like Borders, Circuit City and Linens ‘n Things, have been an especially popular draw for many medical tenants.

In one such project, construction will start this spring on a conversion project by St. John Health System to turn a 20,000-square-foot former Borders bookstore in Grosse Pointe, MI, into medical office and retail space. The medical office will occupy one end of a large building, which was also vacated by Ace Hardware.

In an early example that helped set the stage for the current trend, Vanderbilt University Medical Center took over the entire upper floor and office space of 100 Oaks Mall, one of Nashville's first enclosed malls built in 1968.

Following a 2008 renovation, Vanderbilt moved 23 clinics and administrative offices into 440,000 square feet of the mall, which still has ground-floor retail tenants.

In another large block of vacant mall space, the Maury Regional Cancer Center will offer cancer treatment, a pharmacy and other services at the Columbia Mall in Columbia, TN.

Retail clinics will remain an important delivery mechanism as health care providers seek to cut costs and handle the surge in newly insured patients with the implementation of the Affordable Care Act, Cross of Colliers said. Accenture expects the number of retail health clinics to double to more than 2,800 by 2015, handling 10.8 million patient visits and saving $800 million annually.

Leasing, Logistical Challenges for Landlords

While retailers and health care tenants share many common needs, there are also significant differences between the two types of tenants, Garratt noted.

Landlords who want to attract both types of users to their developments need to be flexible in lease negotiations with medical providers. Permitted and exclusive uses, control of odors, and tenant’s right of first refusal are areas where the health care tenant’s leasing requirements may diverge from most retail tenants, she said.

Shopping center leases typically prohibit the use of office or other non-retail uses. Medical offices often include cafes or gift shops that may run afoul of another retail tenant’s exclusive use provisions, she noted.

Further, large-scale drug and discount stores and supermarkets are increasingly offering their own in-store retail clinics offering limited medical services.

Restaurants sometimes emit strong cooking smells that may not bother shoppers but would be disturbing to patients undergoing certain types of treatment, Garrett said.

"Both the retail tenant’s lease and the medical tenant’s leases will need to address the interplay between these competing uses," Garrett said.

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