The Rise of Medtail: Healthcare Tenants and Ground-Floor Leases
By Nathaniel Mallon, Verada Retail
The COVID-19 pandemic led some retailers to adopt a more permanent e-commerce business model. Forced to give up prime real estate locations in street-level storefronts, malls and shopping centers, these owner-operators pivoted to online models for moving inventory.
Taking their place—and space—in this new retail landscape are healthcare providers. These tenants are abandoning their traditional offices for greater access, convenience and visibility.
While tenants gain access to daily, high-volume consumer foot traffic, landlords gain peace of mind, knowing that doctors, dentists and other healthcare providers can bring employed, insured patients to their offices. This, in turn, increases spending within surrounding retail, while luring higher-profile clients to other portfolio properties.
Let’s take a look at what’s driving this trend.
Medical tenants are taking advantage of new vacancies in retail spaces, which is encouraging landlords to offer higher tenant improvement (TI) capital compared to what was provided to previous retailers.
CARR U.S. healthcare provider representative Evan Gassman explained that “healthcare is an expensive buildout,” especially when tenants like dentists require specialized plumbing while meeting American Dental Association Requirements. Yet he adds that these tenants tend to have a much higher success rate than restaurants and other retailers.
While tenant concessions can be pricier than those of past retailers, so can the results. “Landlords should be prepared to invest in the tenant a little bit because in return, the tenant is going to sign a long-term lease,” Gassman said. “That’s what they want.”
Increased in Mixed-Use Communities
Ground-floor retail space in dense urban areas and other mixed-use residential properties offers tremendous opportunity for tenant offerings, resulting in a consolidated hub of services for community members who prefer a self-contained lifestyle where everything – shopping, daily and professional services – is within walking distance from home.
For example, Verada Retail recently represented the landlord at 24 Fourth Avenue, Boerum Hill in New York City. This luxury mixed-use condo building offers 11,000 square feet of ground-floor retail, which the landlord opted to diversify and lease to three different tenants. The occupiers are a dentist, dermatologist and organic market.
“The plus side of having a medical provider in your space is that they sign a long-term lease and they’re class A tenants,” CARR’s Gassman commented. “They may not be a large retailer or standard retail place like Starbucks. But medical providers, in general, pay their bills [and] have very low default ratios on their loans, so they’re a great tenant to have.”
Clinicians are spending more time determining if specific space can reach the right patients in their coverage area. Hospitals are also leasing urgent care and other specific treatment facilities in ground-floor retail spaces to match the area’s demographic profile, rather than having patients come to them to seek treatment.
The COVID-19 pandemic also led healthcare providers to weigh the pros and cons of leasing retail space. Said Gassman: “I think with COVID, people said, ‘okay, I’m going to be working from home now, so where in my neighborhood am I going to go to the doctor, the dentist or urgent care versus from my office?’” He continued that, prior to the pandemic, someone working in Midtown New York might want providers closer to their offices. “Now, however, someone working from home in Brooklyn may want to have their whole healthcare network within their neighborhood. It just makes the commute a little easier,” Gassman said.
Newly constructed and renovated ground-floor spaces with amenities have become increasingly attractive to medical tenants interested in modernizing and make their practices more attractive. Ground-floor spaces are extremely popular in the dental and dermatology industries, where offices often occupy key corners in dense urban areas. This is in stark contrast to traditional medical buildings and campuses that house healthcare facilities that are often distributed around multiple floors and out of sight from the public.
Medtail as the Future?
Landlords today are recreating spaces to attract and accommodate medical professionals. But how this trend progresses remains to be seen as we move into a post-pandemic environment.
Gassman said a great deal depends on the provider. Tenants who want the exposure and neighborhood appeal of a ground-floor retail space are more likely to make the move. However, they can expect to pay a premium for these locations and should take this into account when developing their overall business plans. For providers who specialize in aesthetic treatments such as teeth whitening, chemical peels or botox injections, the retail component may be attractive. For other providers, the move to a retail location could pose greater risk, especially if they are part of a well-known practice and receive much of their business from other doctors.
Regardless, medtail is here to stay and can be an effective way for providers to grow, attract new patients and better serve existing patients by making healthcare more convenient and accessible.
Nathanial Mallon is managing partner with Verada Retail, a service that directly connects business owners with commercial landlords and space throughout the New York City area.
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