InterFace Panel: Healthcare Operators Eye Retail Properties

by Taylor Williams

DALLAS — Fueled by a growing population, a healthy flow of capital from a variety of investment sources and an emerging emphasis on quickness of delivery of services, the American healthcare real estate market is poised for expansion.

The heightened demand for both new and old healthcare properties is forcing operators in the sector to consider alternative locations. Healthcare operators are thus finding new real estate opportunities from emerging trends in other property classes, like the spates of store closures in the retail market and the rising popularity of the mixed-use development.

For their part, owners and developers of retail and mixed-use assets are embracing the growth of the healthcare sector, whether that means repurposing a strip center to be anchored by a healthcare tenant or integrating a wellness component into blueprints for a new mixed-use project.

A quintet of healthcare real estate professionals who represent the provider side of the market came together at the InterFace Healthcare Real Estate conference on Sept. 14 to assess this practice and its future implications on the market. Held at the Westin Galleria hotel in Dallas, the daylong event drew about 240 attendees.

Panelist Sid Sanders, senior vice president of real estate management for healthcare provider Houston Methodist, noted that the push to merge healthcare tenants with non-traditional healthcare properties stems from a market shift toward decentralized delivery of services.

“Much of the providers’ contact with patients is moving into a distributed system that is community-based and accessible,” said Sanders. “So we have medical office buildings (MOBs) on traditional healthcare campuses for our specialists, as well as a network of leased storefront spaces that offer primary care and doctor rotations.”

Sanders added that his firm recently acquired a big box retail asset near the Galleria-Uptown area to house an orthopedics and sports medicine practice. The property made sense for the practice, which needed a building with high ceilings to accommodate the imaging equipment and large open spaces for patients’ physical therapy exercises.

Moderator Jim Hayden, executive managing director of CBRE’s healthcare real estate services division, echoed Sanders’ analysis. Hayden pointed out that retail properties make sense for this new model of healthcare delivery because proximity and accessibility to consumers is the essence of a successful retail location.

“Healthcare providers around the country are focused on getting closer to patients and making services more convenient for them,” said Hayden. “So we’re seeing hospitals and providers look at retail spaces for their demographics, size and closeness to patients.”

Panelist Jon Sullivan, vice president of real estate operations for Texas Health Resources, addressed the growing role that developers of mixed-use properties are beginning to play in healthcare real estate.

“A lot of these developers are reaching out to healthcare systems and saying, ‘Hey, we want a wellness component for our project,’” said Sullivan. “They don’t want a hospital or a freestanding emergency department (ED), but they want something wellness-related so the business community can get basic services conveniently.”

While he acknowledged that these trends are gathering momentum throughout major markets, Sullivan was also quick to point out that the new delivery platform does have its drawbacks, particularly for healthcare providers who require larger spaces.

“Typically, large family practices are parking-intensive, which can be problematic in a retail center,” said Sullivan. “Tenants are also likely to receive less in capital improvement allowances from retail developers, which drives up occupancy costs.”

Panelist Ross Caulum, senior director of corporate real estate for San Diego-based Scripps Health, concurred with his colleagues on the demographic appeal that retail and mixed-use properties offer healthcare providers, but he added that the merging of the two is also likely to lead to co-tenancy issues.

“The repurposing of retail makes sense, because medical real estate has always been retail-like as it’s driven by the information power of paper records,” said Caulum. “But there’s a psychology issue because, at the end of the day, other tenants don’t want to be around sick people.”

However, the relationship works both ways, as noted by panelist Dana White, vice president of real estate and construction for Washington state-based Providence St. Joseph Health. While patients don’t necessarily want to receive treatment in crowded centers, they are generally drawn to a retail center’s ability to house a drugstore, thereby providing one-stop shopping for both medical and pharmaceutical needs.

In addition, White said, technological advancements are also playing a part in healthcare real estate practices.

“We’re seeing more and more of what we call ‘express care,’” said White, whose firm recently bought and repurposed a strip mall to use as operating space. “These are small clinics, maybe 1,000 square feet, that do a lot of electronic interfacing. So if I have an eye infection, I can face-time with my provider, who can examine me and call in my prescription. These kinds of trends are also impacting our space needs.”

Taylor Williams

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