Photo: Kellie Hill Kellie Hill | Courtesy a representative of JLL

New Rules for the “Retailization” of Healthcare

Carrie Rossenfeld Healthcare & Education

With healthcare reform has come the movement of medical providers from hospital campuses and hospital-adjacent medical-office buildings (MOBs) into the community — more specifically, into retail settings. We’re just as likely today to see healthcare users side by side with banks, gyms, and restaurants in the same retail centers, particularly in the Orange County market, where several health systems have made their mark.

This crossover of medical users into mainstream retail centers has placed these users on the same playing field as other retail tenants, which has necessitated a new set of rules for landlords, tenants, and health systems. SoCal Real Estate spoke with Kellie Hill, senior associate with JLL’s Southwest healthcare-services team, about what Orange County landlords, tenants, and health systems need to know about the new healthcare frontier.

SoCal Real Estate: What do Orange County retail landlords need to know about the “retailization” of healthcare?
Hill:
First, they need to understand why medical tenants are acting more like retailers. Medical tenants are shifting their delivery focus from just delivering healthcare on their campus to looking for ways to deliver healthcare to a community. Medical tenants are really beginning to focus on ambulatory or outpatient care. This is partly due to patient demand, but also due to payor reimbursements. In the past, as we all know, 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. However, hospitals are starting to transform their focus to high-acuity patient care. Anything that’s not of a high-acuity is now going out into the community

Medical tenants add diversity to a landlord’s shopping center, and they provide additional customers to the co-tenants of the shopping center. In addition, their peak hours of operation are opposite of those of a typical retailer, allowing an ease on parking restraints.

Patients want health services to be in the same places where they go every day. They don’t want to go to a hospital for healthcare. They want their urgent care and everyday services in a convenient location. In the retail real estate community, tenants are looking at trips and demographics: how many people are visiting the shopping center, who is visiting the shopping center, and how is that driving sales? Medical tenants are beginning to ask these same questions of their patients, and that’s why we’re starting to see the change in mentality.

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. 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, id $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.

How are healthcare tenants being educated about the differences between traditional MOBs and retail settings?
Healthcare tenants are really beginning to understand and look at demographics and co-tenancy. 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. They don’t want to be next to some and want to be next to others. They want to be in shopping centers that have Starbucks. And healthcare tenants are starting to think of that co-tenancy, too, which is very different from a traditional healthcare location. They now need to consider where and how patients will get to them and what else will they do once they are there? They need to think about where the patients are, what the payor mixes are in the area (private pay, Medicare, etc.), and what is the anticipated demographic growth in the area for the next five, 10, 20 years. They are starting to evaluate their real estate as a typical retail tenant would and are having to understand that working with shopping-center owners requires different language. They need to make decisions faster, as they are typically competing against traditional retailers for the same space. To successfully negotiate a lease, the real estate team needs to anticipate the challenges, help identify the landmines prior to the negotiations, and help educate both the landlord and the tenant on timelines. In most cases, you’re speeding up the tenant and applying the brakes on the landlord.

What else are medical tenants learning about these differences?
They’re having to think about their presence in the shopping center, their signage in the shopping center, and having their brand recognizable. Their street views are important — they want to be on main and main — and they are thinking about parking and ease of access to their location. They’re conscientious about where the handicap parking is and where the ramp is. The medical user is focused on patient access, whereas the typical retailer is not. Patient experience is crucial in today’s healthcare environment, and the right location is helping to drive a positive experience.

What else should our readers know about healthcare retail estate in the retail setting?
It used to be that medical tenants were paid a fee for service. They got paid each time you went to the doctor. But now, it’s moving over to a fee for value. They’re having to think about how this patient is going to buy their service and why they should buy it. That’s retailization. If Macy’s puts a shoe in their store, they have to be confident that the customer who comes into that store will buy it. And that’s how medical tenants are starting to think about their services. They are concerned about the right mix in a specialty group and whether they need a urologist there or a breast center for mammograms or a pediatrics practice. There’s a focus on primary care, but what specialists need to be there?