“Medtail” has been the buzzword in the commercial real estate sector, especially over the past year. Medtail, short for “Medical Retail,” is bridging the gap between health and wellness provider facilities and brick-and-mortar retail outlets, and the hybrid is fueling retail leasing activity in droves. Medtail-anchored malls are increasingly viewed by retail investors as such a reliable asset that it’s only natural to assume that medtail centers would be the perfect material for prime real estate. But if that’s the case, why are medtail centers often relegated to subprime areas of malls?
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Medtail has been dubbed a “retail cure” after commercial landlords turned to healthcare providers to fill their empty spaces after the pandemic ravaged the retail sector. During the pandemic, many commercial landlords saw their rental rates drop and their retail tenants churn. Meanwhile, the pandemic bolstered the financial clout of medical practices. As asking rents for commercial space fell, medical providers began taking advantage of the lower rents and embraced the idea of opening their offices in former retail spaces to provide more convenient care to their patients. According to data from CoStar Group, the percentage of leased medical space in retail buildings increased in February from 16 percent in 2010 to 20 percent now.
The hype surrounding Medtail is palpable as the rise in remote work thanks to the pandemic underscored the need to develop medical centers closer to residential areas. “People need medical care where they live,” Jason Muss told Bisnow in April. Muss is President of Muss Development, a New York-based real estate development company that is investigating Medtail as part of its strategy. According to Muss Medtail, “[is] no compromise. It’s a strategy for diversifying your tenant list and meeting a need in the community.”
Landlords opening their properties to medtail renters at the height of the pandemic might have felt it was a compromise to generate cash flow, but it quickly became apparent that medtail renters were driving much-needed foot traffic into their malls. As much as COVID-19 has sparked an explosion in virtual doctor appointments, most medical services cannot be performed online. Physicians still need to physically see their patients to provide them with appropriate care, making Medtail a great candidate for driving traffic to a shopping area. Additionally, Medtail attracts more shoppers to malls, particularly during daytime, the slowest weekday times for retailers.
The pandemic was less the cause of this symbiosis than an accelerator. Edward Coury, managing director at RCS Real Estate Advisors, a firm that analyzes retail real estate portfolios, told me that investors viewed Medtail as a way to revitalize the retail sector long before the pandemic reared its ugly head. “Medtail is actually pretty well developed, it’s not in the making anymore,” he said. Apparently investing in Medtail had been a key leasing strategy for several companies years ago. In fact, Westfield, an Australian real estate conglomerate, actively invested in Medtail when Coury served as the company’s senior vice president.
“Popularity has only grown as rental companies recognize the fact that medtail centers are adding another travel fulfillment to their customer base,” Coury said before changing his tone. “What I still find strange is the fact that some rental companies want to put their medtail units in the back corner of the mall. This is a problem for our customers. And it shouldn’t be a problem. There’s no reason why medtail occupiers should really take inferior real estate. Medtail is absolute doorstep material.”
So if landlords are so willing to rent space to medtail tenants because medtail tenants are attracting customers to their malls, why are medtail tenants pushed into the least desirable and less accessible areas of their respective malls?
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There are several reasons landlords have previously resisted the idea of leasing medical providers instead of a traditional retail tenant. Accommodating medical tenants in former retail and office space can be challenging. On the one hand, it is about providing an adequate technical structure so that the Medtail office can function. If you don’t have high enough internet bandwidth, it will eventually become a big problem for the medtail renter. On the other hand, medical tenants will demand special interior designs and more intensive sanitation requirements in order to achieve ADA compliance. Medtail builds can require a much higher investment. “Imagine a 2,000-foot space for a retailer,” Coury explained, “that could cost about $400,000 to build. A medical renter costs around $800,000, almost double the investment in the space between the equipment and the fit out.”
Then there is the problem with multi-story developments. It was (and still is) tempting for a developer to add a second level to their center to double the area while saving on costs, as ground floor construction is typically more expensive. There is an expectation that the second floor, while less accessible than the first, will fill up with tenants more quickly as the rent would be lower. Second floor tenants are trading less desirable properties for lower rents and therefore higher yielding shares. But often this strategy can backfire, especially when it comes to medtail. Medtail operators generally require ground floors so that they are as accessible as possible for their patients.
But Coury says the stigma attached to medtail stores is one of the biggest obstacles. Coury pointed out that, unlike retail stores, traditional medical centers are not customer-centric. There is less emphasis on creating an inviting design. Coury said landlords need to understand that Medtail is an entirely different product that could Add increase the attractiveness of the shopping center instead of distracting from it. “Medtail isn’t a typical clothing-on-window retail environment,” Coury said, “but there’s a bit of an evolutionary aspect to the design. There needs to be a collaboration between the landlord and the user on how the Medtail unit can look like what it is, namely a place dedicated to medical technology. At the same time, it has to fit into the overall aesthetic of the mall.”
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Good design is critical to the success of a medtail renter, according to Coury. It’s something he’s adamant about because he’s seen it firsthand. One of Coury’s clients is InBrace (DBA InStudio), an orthodontic appliance manufacturer, and they are currently in the process of developing their first studio on a property in Denver, Colorado.
During negotiations with the developer, Coury’s team at RCS Real Estate Advisors determined that the developer was expecting something with imposing surgical equipment and harsh neon lights. “They didn’t know what it was going to look like because we hadn’t designed it yet,” Coury said. RCS Real Estate therefore partnered with Dupuis Design to create 3D concept art showing what the InBrace medtail unit would look like. “When I sent that draft over,” Cour began with a smile, “they were blown away. They said, “This is absolutely front door stuff,” and now this studio is going to be the front door to this mall.”
Coury believes that once InBrace’s new studio is up and running, both developers and landlords will be able to see Medtail tenants fulfilling their potential as anchor tenants by being on the front lines. Also, medtail renters tend to stay longer than their traditional retail counterparts. Ashley Casey, senior director of national accounts at Phillips Edison & Co., based in Cincinnati, said that medtail renters “tend to take out longer-term leases because they have to invest a lot of money to get set up in space and they need time to do it establish their presence in a community. That makes them attractive for owners and all other investors.”
Medtail tenants are less able to serve their community (and, in turn, pay rent to their landlord) when they are not in easily accessible areas of their respective malls, which in turn means their landlords are able to reap capital. That’s because medtail renters tend to pay higher rents. Compared to local or regional merchants and restaurant owners, many medtail renters have better credit ratings and are therefore seen as lower risks.
While medtail is a relatively young sector, it’s clear that they are an asset to the retail revitalization. Landlords and investors may warm to adding these types of tenants to their portfolios, but if they confine these traffic drivers to less-desirable areas of their malls, they’re really doing themselves and the medtail tenant a disservice. It is clear that Medtail is a new niche that is transforming the retail sector and revitalizing retail activity.
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