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Is Retail Space Being Replaced with Healthcare?

By Brian Kline | May 28, 2017

As an industry sector, commercial real estate continues consolidating. An emerging trend is for much of the unused retail space being converted into healthcare and urgent healthcare facilities. This is a natural extension of what has been going on for many years – healthcare services opening in small shopping strips and shopping centers. Now, it’s happening on a larger scale. As baby boomers age and require more health services, this can be expected to be both a growth and sustainable commercial sector for a few decades to come. At least, for as long as there is no technology on the horizon to move healthcare online.

Morningstar Credit Ratings just released its latest commercial mortgage-backed securities (CMBS) research report: Urgent-Care Centers--The Cure for Ailing Real Estate or Just a Bandage? The report features:

  • Existing CMBS exposure to urgent care centers.
  • Factors driving the rapid expansion of these centers, including demographic changes and government policy.
  • Trends in combining healthcare and retail tenants in commercial real estate properties, which is partially driven by lower retail rents.
  • A discussion of obstacles to growth in the sector.

For full report click here (reg reqd).

Among Morningstar’s primary findings is:

“We found $739.8 million in commercial mortgage-backed securities with exposure to urgent-care centers as one of the five largest tenants, but this may understate total exposure, because many centers lease smaller spaces. While this mixing of medical and retail may put a bandage on the slow bleed from retail tenants’ bankruptcy filings, it isn’t without risks. Impediments include consolidation in the urgent-care industry, competition, and possible changes to the Affordable Care Act.”

A significant appeal of shopping center based healthcare is the cost savings outside of the traditional hospital campus and medical office building complex. This conclusion begins with the analysis showing “The number of these centers rose 22.6% from 2014 to 2016, according to the Urgent Care Association of America, a nonprofit industry group based in Naperville, Illinois. “With the vacuum that retailers have left, rents in some centers are now cost-effective. U.S. shopping center rents average $14.73 per square foot as of the first quarter of 2017, per CoStar Group, Inc., compared with medical office rents of $21.46 per square foot.”

The attraction of these retail settings isn’t limited to aging baby boomers. These smaller healthcare operations appeals to both baby boomers and millennials with young families. IBIS World, an industry research firm, reportedly sees urgent-care revenue growing to $19 billion by 2020.

Also of interest is that capitalization of these healthcare centers isn’t limited to hospital expansion and CMBS funding. Private equity and venture-capital funds have fueled much of the industry’s growth, having invested more than $3 billion into urgent-care clinics from 2010 to 2015, according to PitchBook (an industry leader of custom research and special reports).

These retail leases often come with strong corporate guarantees and familiar industry tenants. Most medical leases feature rent escalations. Adding to the attraction is that many hospitals and insurance companies view urgent-care centers as a way to contain costs by keeping people out of the hospital, preventing unnecessary admissions, and emergency-room visits, according to Managed Care magazine.

However, this trend isn’t without risk. Significant uncertainty surrounds how urgent-care trends will evolve. Much of the medical insurance money flowing to these facilities comes from the government controlled Affordable Care Act (ACA). At this time, these facilities deal with a minimum of regulatory requirements. For instance, urgent-care operators are not required to register with the government or get accreditation by the Joint Commission, a nonprofit organization that accredits more than 20,000 healthcare organizations and programs in the United States. How this plays out depends on what will or will not result from ACA government policy changes that are now being considered by the U.S. Congress. A decrease in ACA enrollment could result in a slowing of growth in this retail space sector.

Furthermore, Morningstar believes that “expansion may slow because new delivery methods (such as telemedicine or in-home urgent care), worksite clinics, and the expansion of clinics within existing stores present competition for urgent-care centers and may damp future expansion.”

Please leave a comment if this article was helpful or if you have a question.

Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for seven years. He also draws upon 35 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. In the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.

Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years with articles listed on Yahoo Finance, Benzinga, and uRBN. Brian is a regular contributor at Realty Biz News
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