From SoCal Real Estate’s September 2018 issue:
Users like medical practices and specialty gyms have unique needs at retail
Recent shakeups in the healthcare and retail sectors have created new partnerships between retail landlords and users who are entering or expanding more deeply into the retail space. Two of the most prominent groups of new and expanding users are medical tenants and specialty gyms.
Years ago, “the hospital or a building around the hospital is where everyone went to see their doctor, whether they were terminally ill or their child needed an immunization shot,” Kellie Hill, senior associate with JLL’s Southwest healthcare-services team, recently told SoCal Real Estate.
But with healthcare reform has come the movement of medical providers from hospital campuses and hospital-adjacent medical-office buildings (MOBs) into the community. “Hospitals are starting to transform their focus to high-acuity patient care,” Hill says. “Anything that’s not of a high acuity is now going out into the community.”
MOBs in or around hospital campuses still exist and are even still being built, such as Hoag Memorial Hospital Presbyterian’s newly opened Fudge Family Acute Rehabilitation Center at its Newport Beach, California, campus at 1 Hoag Drive. But so are MOBs that are more community focused and less centralized on the hospital campus, such as of Newport Heights Medical Campus, a 59,978-square-foot medical center in the Santa Ana Heights area of Newport Beach, California, which was completed in April by Real Estate Development Associates LLC.
Medical tenants’ shift from a hospital-focused real estate model to a community-focused one has necessitated a move into the retail setting. This crossover has placed medical users on the same playing field as other retail tenants, which has necessitated a new set of rules for landlords, tenants, and health systems. While retail landlords are eager to fill space formerly occupied by clothing stores, record stores, and other users that are growing obsolete due to e-commerce, and medical users need to be in retail settings, each is having to learn the other’s language in order to make this marriage work.
“Medical tenants add diversity to a landlord’s shopping center, and they provide additional customers to the co-tenants of the shopping center,” Hill says. “In addition, their peak hours of operation are opposite of those of a typical retailer, allowing an ease on parking restraints.”
At the micro level, for regional shopping-center landlords, the difference between leasing to a typical retail tenant vs. leasing to a health system and/or doctor lies in rents, tenant improvements, and timing, Hill points out. “Rental rates are basically the same between the two, but the timing it takes to make decisions is different. Medical tenants take a lot longer to make those decisions because there are boards and committees involved. Many medical tenants are non-profits, so there are different mechanisms that they need to go through before making real estate decisions, so retail landlords need to understand that a little bit of extra time is involved.”
Also, higher TI dollars are needed for healthcare buildouts. “In a typical retail lease, many landlords will only want to contribute $15 per square foot to $45 per square foot to the tenant improvements. A typical healthcare build-out, depending on the services provided, is $150 to $250-plus per square foot. If the landlords could provide more tenant-improvement dollars to the tenant, it would help bridge the funding gap. By helping to bridge the gap, the landlord would gain a tenant with excellent credit, strong community ties and the ability to sign long-term leases.”
Meanwhile healthcare tenants are beginning to understand and look at demographics and co-tenancy in the retail setting. Hill says retailers are incredibly educated on this — they know who their competition is and know where they need to be located in relation to their competition, but healthcare tenants are starting to think of that co-tenancy, too, which is very different from a traditional healthcare location.
While not new to the retail setting, fitness gyms have undergone a serious overhaul in recent years. In addition to chains like 24-Hour Fitness and Crunch, which attempt to satisfy the fitness needs of many different types of customers, specialty gyms that focus on cycling, Pilates, yoga, or stretching have come into their own and are expanding their use of retail space.
According to a recent report by CBRE, fitness has become one of the most active occupiers in the Southern California (Greater Los Angeles, Orange County, and the Inland Empire) region in the last 10 years, “but it wasn’t long ago when they were considered somewhat undesirable among property owners. Gym patrons were typically unlikely to stop by the other shops in the center after working out. and such large swaths of retail space were better suited for big box tenants. Fast forward to today and the paradigm has shifted considerably.”
The report goes on to say that since 2008, fitness users have leased 8.5 million square feet in the Greater Los Angeles, Orange County, and Inland Empire region. “Last year alone yielded the highest deal count in the last decade, with 1.1 million square feet leased by fitness tenants. Shifts in both landlord and consumer preferences drove demand. Fitness users want more of an experience and landlords recognize that working out cannot be easily usurped by e-commerce. Gym goers have become a captive audience and are now far more likely to visit adjacent retailers before or after working out.”
One area that makes gyms unique from other retail users is acoustics. Kirei, a provider of innovative acoustical materials, says that fitness facilities are filled with energetic people, motivating pulsing music, and noisy workout machines that collectively can contribute to distracting echo and unnecessary commotion for surrounding spaces like Hotels, office buildings, and high-res residential buildings with dedicated fitness areas. The firm offers solutions like EchoScreen, a modular solution for visual and acoustic space division.
John Stein, president of Kirei, tells SoCal Real Estate that, to most of the world, loud blasting music and overwhelming echo is “just the sound of the gym,” and that’s the way it always was and always would be. “Fortunately, today, designers have a better understanding of just how detrimental this noise pollution can be and are designing with acoustics top of mind in order to suit the needs of occupants.”
Awareness of amenities at the office and in their residential spaces is affecting customers’ expectations at gym as well, Stein says. “It’s no secret that gym memberships are increasing as customers’ amenity expectations increase. There are plenty of choices out there, but consumers are voting with their feet and their wallets. Members choose a great experience, one that makes them enjoy their workout and time there. Great amenities and experiences, lighting, sound, water, juice bars, and high-quality towels all help influence these decisions.”
All commercial settings need to be designed with acoustics top of mind; however, lobbies, hallways, and other open multi-use spaces are the most important spaces to be mindful of acoustics, Stein points out. “A customer’s experience starts as soon as he or she walks in the door, and too-loud or too-quiet spaces can adversely affect their perceptions. A business owner never wants to hear a patron say, ‘Let’s get out of here; it’s too loud to talk’ or ‘It’s too quiet in here.’ It’s bad for business — whether in a gym, restaurant, or multi-use lobby.
Fortunately, acoustics can be fixed relatively inexpensively, but Stein says perception is different for everyone. “It’s important to look at the audience and to understand what is wanted and needed to tune the space — whether it be a muted, velvety sound or a young, energetic sound. Also, it is essential to work with designers and professionals who understand acoustics. There’s a science behind sound, and taking acoustical needs into account early in the planning process lowers cost and will improve the results of the overall space.”
Petra Durnin, CBRE’s director of research and analysis for SoCal/Hawaii, tells SoCal Real Estate that smaller fitness tenants are growing in a sector previously dominated by large clubs and gyms. “The smaller players can more easily target specific industry trends such as cross-fit, group training, yoga studios, and boot camp—all of which are gaining popularity with younger consumers. Niche service that clients have never seen before can gain traction quickly, too like trampoline parks and skydiving centers, especially if there is an experiential component.”