Prognosis of Medical Office Buildings



The demise of the retail mall and other brick and mortar retail spaces has become a natural fit with the expanding need for convenient off campus medical facilities. There are many reasons behind the change in how many health care services are delivered. The reasons vary greatly but among them are the federal government reducing the services it will reimburse, hospitals nationwide consolidating, and fewer people traveling long distances for care. An ongoing and unabated trend across the country is development of ambulatory care centers, outpatient centers, and medical complexes. This is especially significant for the declining retail malls across the country.

It has become a common strategy for healthcare providers and healthcare real estate firms to repurpose the buildings of failed big box and department stores. The bankruptcies of Circuit City, Linens & Things, Blockbuster, Borders and other retail chains dumped hundreds of large (50,000 to 200,000 square foot) spaces on the market — at the same time as providers were warming to the idea of the retailization of healthcare. This seldom seen but ideal scenario matches relatively low lease rates or sale prices (because many retail landlords and building owners are desperate for income) with the strategic opportunity to quickly and cost-effectively locate large multispecialty outpatient centers in convenient off-campus locations. Patients benefit from health services closer to where they live, work, and shop.

The result is health services that are more user-friendly, accessible, and less intimidating. This improves the overall quality of care, especially among people who would not otherwise seek preventative care or treatment. The buildout of such facilities presents rarely seen opportunities. Especially as health care providers with strong balance sheets show a willingness to enter into long-term leases. Win-win-win.

Not All Brick and Mortar Spaces Will Benefit

Further strengthening this matchup is the expected continuing decline of brick and mortar retail coupled with the growing need for medical services as the baby boomers age. However, many of the most desirable mall locations were snapped up within a few years after the Great Recession when it became obvious that big box retail was not going to adequately recover. While more big boxes will come on the market in time, the remaining struggling smaller retail facilities are not likely to benefit from the health care move to more convenient locations. This includes the 1,000 Payless shoe stores and 552 Radio Shacks are available for repurposing. Where repurposing opportunities still exist is with J.C. Penney (closing 138 stores), Kmart (108), Macy’s (63), and Sears (42).

Structural Changes Needed

Still, the change from retail to medical is not as simple as changing the business sign out front. While the wide-open spaces and high ceilings make the conversion easier and more cost effective, there are significantly different needs for medical centers. On more obvious is the exterior appearance and entrances have been neglected by years of financial hardship. Although these malls offer ample parking, visitors to medical facilities often cannot make a hundred yard walk from parking to the entrance. User-friendly drop off points will need to be added. Medical facilities also have more stringent air quality requirements than the malls were designed for. Increased airflow, heating, and cooling capacities are needed. Many more temperature zones and control points are needed to sufficiently manage exam rooms (open backed gowns), waiting rooms (winter coats), and staff spaces that all have different temperature requirements. Additionally, complex health care spaces such as operating rooms, imaging equipment, and compounding pharmacies have strict minimum and maximum humidity ranges dictated by code. All of this also requires increased system reliability.

Retail to medical is one of the best adaptive uses of commercial brownfield spaces to become available in suburban and urban settings. Certainly, there are other great creative opportunities to repurpose old properties to new and modern functionality.

Please comment with your thoughts about the opportunities to come.

Photo Credit: paulbr75 via pixabay

Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 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. With the Pacific Ocean a couple of miles in the opposite direction.