As our nation transitions into a “post-pandemic world,” consumers are now more than ever looking for new and convenient ways to get quality healthcare services. So much so that a 2020 survey conducted by ICSC[1], a trade group of retail property owners, found that almost 7 out of 10 adults visit a healthcare provider in a shopping center or outdoor strip mall. The movement coined as “medtail” is a growing trend across the nation where healthcare providers are moving from the large traditional community hospitals into more convenient retail spaces. The rise of medtail, coupled with the growth of online shopping and the ever decreasing need for brick and mortar retail locations, has many landlords now considering healthcare service providers as tenants in their retail location. Adding healthcare services to a retail center provides many benefits, but landlords should keep these few things in mind as they look to repurpose their traditional retail space.

Base Building Infrastructure

Converting traditional retail space into a space viable for a healthcare service provider can be both challenging and expensive. The infrastructure needed for most healthcare services requires a much more robust base building infrastructure than the typical retail shopping center has to offer. Healthcare service providers often require increased plumbing and HVAC, increased floor load for heavy medical equipment, excess power consumption and in some instances separate hazardous waste disposal systems. It is important for retail owners to make sure that their retail space can accommodate these increased base building requirements before signing a lease with a healthcare provider. With these increased base building requirements comes increased costs, which are most often initially incurred by the retail owner. According to experts in the medtail space, a medtail buildout can be nearly two times the cost of a traditional retail space. Although this initial conversion to medtail can be costly and time consuming, healthcare service providers are now more than ever pushing for the conversion of traditional retail space because of the increased access and visibility that traditional retail offers and the growing uncertainty of new construction projects. 

Tenant Mix

While healthcare service providers must determine if a specific location will reach the right demographic, landlords must also consider whether the patients of the healthcare service provider are in line with the rest of their tenant mix. For example, if a retail center targets a younger market, adding a healthcare provider who serves Medicare patients is likely not the right fit. This might seem like an obvious concept, but desperate times call for desperate measures. Retail owners are eager to fill vacant space in this current market, however, disrupting the tenant mix of a retail center can have lasting effects. On the flip side, creating an environment where tenants offer complimentary services can increase foot traffic (and hopefully increase revenue) and create long term tenants with minimal turnover. Another key consideration when deciding whether a healthcare provider is the right fit for a retail space is parking. Healthcare providers typically generate more traffic than a traditional retail tenant, so if parking is already tight in the retail center, adding another high traffic tenant to the mix might not be the right fit.  

Negotiating the Lease

Because a healthcare service provider is very different from a traditional retail tenant, landlords should account for those differences in their lease documents. A few of the many differences that should be addressed in a medtail lease are the following:

Permitted and Exclusive Uses. Until recently retail tenants have been resistant to the idea of having healthcare service providers as their next door neighbor. So much so that traditional retail tenants often negotiated so that medical services were a prohibited use in the shopping center. As such, a landlord should carefully review their existing leases before engaging with a healthcare service provider. Additionally, healthcare service providers will often require an exclusive in the shopping center for their permitted use. Landlords should carefully negotiate these exclusives and be as specific as possible to avoid limitations on the further expansion into medtail. For example, if a healthcare provider only offers pediatric services, a landlord should only grant that tenant an exclusive for pediatrics as opposed to a blanket exclusive for medical services. These lease provisions can have a major impact on future growth and marketability of a shopping center if not properly negotiated and drafted.  

Landlord’s Inspection Rights. Retail leases typically grant the landlord a right to access, inspect and show the premises to future tenants, however, a landlord and their property manager will need to be familiar with both patient privacy laws and the privacy requirements of the healthcare service provider before accessing the premises and confidential patient records.  

Relocation Rights. It is also common for landlords to reserve the right to relocate a tenant within the retail center if the landlord determines it is in their best interest to move a tenant to a new location in the retail center. Because of the increased base building infrastructure (discussed above) and ultra-specific tenant improvements, landlords should consider removing this provision from the lease.

FOOTNOTES

[¹] https://www.nytimes.com/2022/02/22/business/real-estate-retail-space.html