Special Focus: Retail (August 2006)

Rubbing shoulders with retail?

MORE MEDICAL SPACE IS POPPING WHERE PEOPLE ARE SHOPPING

 

By Sonja Pedersen-Green

Retail locations might just be a new hotspot for medical properties.

Although small clinics in big box retail stores have been around for a few years, the new trend might be integrated medical office/retail development, or the placement of medical facilities, such as medical office buildings (MOBs), near retail facilities or as part of a mixed-use development. 

These facilities and their tenants vary greatly in size and type, and their inclusion in these developments is sometimes unplanned. Occasionally, medical tenants are opportunistically opting to lease traditional office space near retail locations when it becomes available.

Jill Rasmussen, a broker with Minneapolis-based Northstar Partners, is actively marketing space in Grove Health, an MOB which will be constructed as part of a mixed-use development in suburban Minneapolis.

“The developers that are actually doing retail development have parts of their projects that may have some office component to them,” Ms. Rasmussen says. “Based on current office market conditions, those spaces, locations and availability have lent themselves better to MOB use rather than straight office use.”

This trend may have inspired developers to start thinking about medical office space as part of a mixed-use development. There are certainly perks, for both retail and medical tenants to lease space in this kind of development. 

The perks of retail locations

According to Bill Maggard, a partner with Mercatus Group LLC of Vernon Hills, Ill., visibility and accessibility are key reasons for medical office placement near a retail facility. Mr. Maggard says that when physicians can say to a patient that a facility is located right next to a retail outlet, or that it’s located on a retail travel route, “it’s easy for the patient to understand where the facility is located.”

Drew Shearer, chief operating officer and managing director of real estate development for Denver-based Development Solutions Group LLC, says that medical tenants are not the only ones benefiting from this relationship.

“Retail developers would do well to consider in their master planning some medical tenants, whether its strip retail or medical office buildings in a master planned retail community,” he says, “because the overall trip generation and the symbiotic relationship to and from retail has benefits for both retail and medical facilities.”

Medical facilities generate “a tremendous number of trips per year,” Mr. Shearer says. “The byproduct of that is that you are increasing exposure of your other buildings – like retail – dramatically because you are increasing the number of trips from the medical buildings.” He says that having a medical facility near a retail location can also draw patients due to the increased visibility that a medical facility would have in a high-traffic retail area. 

Ms. Rasmussen says that retail/medical developments “lend themselves to the consumer.” The physician-tenants are near their patients, she says, “So they can try and increase patient base.” Bigger, traditional MOBs “are going to be in a different location and serve different needs,” she says. “I think just being in that location helps them out.”

“If people are aware that medical services are available near a retail location,” patients might choose the medical practice near to the retail location for reasons of convenience, Mr. Maggard says. Mr. Shearer agrees.

“Retail can function as an amenity (for a MOB),” he says, “If you have a family member going to undergo an hour surgery (at an outpatient surgery center) and an hour recovery before you can take them home, then you have to have something to do for two hours,” he says.  

“If you can get out and do some shopping while you’re doing waiting,” Mr. Shearer continues, “It really is an added amenity to the medical building to have something for the family members to do while the patient is busy.”

The parking situation is another advantage. Most medical offices are busy during business hours, typically from 8 a.m. to 5 p.m., whereas most retail sites see the heaviest traffic in the evening and on weekends. Thus, it seems logical for retail and medical facilities to share parking space. Mr. Shearer says.

“When folks are off of business and looking to shop, they’ve seen the retail location by visiting their medical office building,” he says. “Then they have time to go back to shop in the evening or weekend and that’s when that medical facility is not busy and the parking works very well together as well.”

Trend or just talk?

The most common locations for these medical/retail mixtures are suburban areas. Mr. Shearer says that there has been a trend during the past 50 years, both in medical and in retail, toward suburban development.

These concurrent trends mean that there has been “more and more overlap between medical and retail (facilities),” he says. Mr. Shearer’s Development Solutions Group recently developed a 70,000 square foot MOB in Englewood, Colo., in which the best location for the MOB was near a major retail center in a mixed-use development because the space on the nearby hospital campuses was landlocked.

Development Solutions Group isn’t the only company involved in this kind of project.

Plans for the $20 million Shops at Seven Oaks near St. Louis include 90,000 square feet of retail and restaurant space, as well as 60,000 square feet of medical offices. The project involves commercial real estate brokerage Foundation Commercial, along with Taylor-Morley Homes Inc. and TB Realty.

In Little Rock, Ark., a similar development is being developed. Plans for the $78 million Metro Park North and South include retail and medical offices as part of a 52-acre complex. Plans call for a mall, convention center and hotel. A $125 million Mercy Health System of Northwest Arkansas hospital is being developed nearby.

Ms. Rasmussen’s Grove Health, a two-story, 40,000 square foot MOB, which was designed as part of a 157-acre mixed-use development, will have “good access, visibility and signage,” she says, unlike a traditional MOB. Because the MOB is a block away from the proposed site of the first new hospital in the Minneapolis area built since the 1980s, “medical practices will be essential,” she says. Therefore, she says that the location of the new MOB in this specific retail setting makes even more sense.

Northstar Partners has seen proposals for space in Grove Health from all types of medical tenants, Ms. Rasmussen says. Because there is new housing near the site, “Pediatrics and OB-GYN are good uses,” she adds, “but we’ve had proposals from general practice to physical therapy and imaging (users).”

Mr. Shearer says that “a whole gamut” of medical facilities can work in a medical/retail setting. “You see a variety of storefront medical facilities that function as a retail shop in a strip retail center,” he says. “Those could include physical therapy facilities and other outpatient services that function well right in line with a drycleaner.”

But bigger facilities also make sense. “I think medical office buildings which have traditional clinical medical office space, ambulatory service centers or other specialty facilities can also find it works well adjacent to retail if it’s planned right,” Mr. Shearer says. 

Ms. Rasmussen isn’t sure that mixed medical and retail development is a trend.

“It’s kind of hard to say,” she says, “Medical users are now starting to change the way they provide services to their patients (to be more like retail). They’re looking for spaces that are single story, (with) good parking, great signage. They’re looking at demographics and go where their patients are, which is similar to retail.”

Ms. Rasmussen says that a lot needs to be in place for medical to be successful in this type of setting.

“Medical follows housing and retail,” she says. “Housing and retail need to be built up and successful for medical to work there, but you’re finding these combinations.”

The synergy between the two “is kind of just happening based on where these types of projects are located,” she says, “Medical development is so tenant driven and so specific, and it’s such a small market, that you can’t really go out and build spec.

“So it’s not a trend yet, but it could be.”

The reality of retail land rates

One reason medical users might not be hopping onboard too quickly is the relatively high cost associated with retail development. Medical office projects in retail locations tend to be subject to those same high costs.

“Retail sites come with a higher price tag and medical office economics might not be able to support it,” Mr. Maggard says.

The high cost of land “can be a drawback,” agrees Mr. Shearer.

“Medical is already an expensive product type to build separate from the land costs,” he say. “Most medical projects that you see that take place on hospital campuses typically look for land that is less that $10 a square foot in a suburban setting in most markets.”

In high-traffic retail areas, pad sites can sell for as high as $30 per square foot or $40 per square foot.

“In a suburban setting, those kinds of prices can prohibit medical development and drive the rents too high,” Mr. Shearer says.

Mr. Shearer says there is a potential solution, however.

If the medical facility is part of a planned community where there are different allocations of land costs, he explains, “the master developer can say, ‘My pad sites for retail are going to have a higher value. But, if I want to create this synergistic relationship with medical, I am going to have to reserve some of the land at the $10 dollars or under level to attract the medical use.’”  

Ms. Rasmussen says that medical tenants in retail areas are typically paying closer to higher office rates than higher retail space. This high price is hard for medical users, she says. In order to do this, medical users, “need to strategically plan their growth and it’s hard for practices to do that,” she says.

“High prices and high construction costs on smaller buildings make it really challenging” to build in retail areas she says, “So you see joint ventures between a bigger healthcare user and a specialty group that try to go together to get the right corner and right building.” q