So, you have a sore knee and you’re already dreading the anticipated drive to Megalithic Medical Maze Hospital for a potential operation later this year. Imagine instead that you could pop in to see a physician in your neighborhood today between grabbing a coffee and getting a haircut. The doc could suggest you visit the physiotherapist next door, prescribe you meds to pick up nearby and recommend the adjacent hot yoga studio for preventive care — and you’re back home with a better prospect for avoiding that surgery.

This scenario sounds so convenient because those hypothetical health spots are located in the very storefronts you’d have visited to buy a cellphone or used book or Aldo shoes just a year or two ago; they’re at the corner shops and centers that are easy to drive or walk up to on your way home, but that have since closed and become hollow artifacts of the slow-burning retail reckoning.

Such is the boon behind “medtail,” or the notion of medical practices taking cues from retail and filling its vacancies, which observers say is one of the year’s most anticipated ongoing trends in commercial real estate.

It’s not a new concept, but medtail is generating accelerating buzz as more shrewd investors capitalize on the synergy emerging from the slump in retail and surge in healthcare to deliver a new use for vacant retail storefronts that solves three problems simultaneously:

  • Retail owners need to remedy leasing vacancies and/or redevelop their asset.
  • Medical systems and healthcare startups seek to satisfy a growing and increasingly granular network.
  • Consumers demand more care — and convenience — than ever.

Got a Case of Vacant Mall? Medtail Will See You Now

“What’s first and foremost driving the medtail trend is what’s been driving it for some time,” explained Allen Bolden, a partner at healthcare real estate advisory firm HBRE. “It’s the overall change in retail. The vacancies that have come from overbuilt retail areas and online shopping have created opportunities for anybody else, really, to get creative. And in an increasingly competitive hospital world, medical is doing that.”

Retail landlords were seeking new uses for vacant space long before the coronavirus outbreak, Henderson Engineers’ retail practice director and principal, Jason Wollum, told LoopNet. At the same time, medical systems have been planning innovative ways to reach out from their mammoth medical campuses and medical office buildings to compete for a widespread network of consumers seeking convenience in their own communities.

“The reason you’re hearing so much about medtail right now,” he continued, “is because people in this niche saw the pandemic as a perfect opportunity to move forward with some of these plans.”

An example of medtail in South Riverside, California, occupied by A Plus Urgent Care and Bright Now! Dental, both on triple-net leases. (CoStar)

Investors are looking at sidewalk stores, strip centers, shopping malls and obsolete big box retailers like Best Buy or Kmart — basically any site that’s positioned to help people get things they need, Wollum continued. “Now more than ever,” he said, “the need is for immediate access to some form of healthcare to take care of yourself both mentally and physically.”

Medtail is thus a salve for all the things that aren’t a medical emergency or a big medical procedure; but things that you would still typically — but shouldn’t need to — go into a hospital or medical office building for, he added.

For Trouble Branding a Medical Enterprise, Take a Dose of Retail

Players behind this push are predominantly healthcare systems, both hospitals and private practices, that are looking to float their name off-campus into suburban areas to source more revenue and drive more referrals, Bolden explained. “They’re looking to further connect doctors to communities. Being out in the neighborhoods really allows them to drive that marketing initiative.”

For consumers, name recognition is everything. “Especially for younger clients, the transplants to a new area, they want to be connected to a recognized healthcare network because it gives them comfort and peace of mind,” Bolden continued.

It’s about gaining trust, noted Mark Chrisman, Henderson’s healthcare practice director and principal. “If I’m already going to X clinic that’s in my neighborhood, I’m much more likely to then go to that same hospital and follow that same health system and follow my same set of doctors. And all of my data that I have an online portal for is seamlessly shared with the hospital when I truly do need a procedure, and now I’m more loyal to that entire health system.”

But this type of branding is something the healthcare world severely struggles with, Chrisman continued, because medical organizations typically build large, acute-care facilities with their name on the side of the building, and then they simply don’t leave.

“Retailers, on the other hand, are really good at having multiple locations, having a seamless experience, delivering a brand message that works across multiple locations and getting the public to trust them,” Wollum continued. “They’re also really good at having consistent customer service from place to place.”

Healthcare is looking to retail to learn and implement those aspects of branding — through nurturing a growing real estate network akin to retail chains.

“Healthcare providers and retailers are partnering up in strange ways that we never would have dreamed of,” Wollum said. “Healthcare sees a need to drive in this direction, but they don’t know how to get there, while retailers excel at it.”

Brand recognition doesn’t stop at the name on the sign, he said, but also goes into “the architecture of the space. It goes into the consistent colors, the consistent design, the consistent lighting, all delivering a consistent feeling when someone walks into that space — the type of consistency that is also key in retail.”

Experimental Treatment: Medtail is High-Risk, High-Return

The shift in mentality from monolithic to meticulous, however, requires a sea change. The best opportunity for landlords may be found in renovating existing spaces. For these users, it’s looking at leasing rather than ground-up construction. “We’ve had to do a lot of education for our current healthcare clients,” Chrisman said. “It’s a lot of, ‘Hey, you need to think about leases. You need to think about doing an assessment up front. Do you have the right infrastructure in place?’ There’s a lot of things that they just aren’t used to, that [Wollum’s] group does every day.”

“Medtail is not always a revenue-producing venture or a profitable venture in the near term … [but] if it is a very successful clinic, you’ve got a high return.”

Allen Bolden, partner at HBRE

Costs are actually an advantage, however. “You’re talking $400-$500 dollars per square foot to build a new hospital,” Chrisman said. Establishing smaller, more agile spaces, especially redeveloped store shells, though, is much cheaper. “We saw one recently go for about $100 – $125 per square foot, and maybe even less than that for some of these retail renovations.”

Upfront capital is a touchy topic, though, because medtail is still an experiment, Bolden cautioned. “Remember that this is not a retail world where, you’re a Chipotle and you’re on your 2,000th location and it’s like, ‘well, if this doesn’t work, we’ll just shut it down.’”

Instead, a medtail strategy requires carefully testing the market. “Medtail is not always a revenue-producing venture or a profitable venture in the near term,” he said. “Ideally, you’d take a building that doesn’t require a major build-out, maybe one that already has adequate HVAC, and the largest expense is plumbing — which you could maybe pay for with a [tenant improvement] allowance or amortize it into the deal — and you’d sign a lease for three years.”

Healthcare firms such as Spira Care, a client of Henderson Engineers, employ the medtail model of facilities. (Spira Care)

There’s the rub, though — he continued. Typically, lessors want to avoid upfront capital and attract tenants looking for long leases. But medtail users want turnkey spaces with shorter leases and low rent so that they can stay nimble. Landlords also want triple net (NNN) leases, but medtail players often prefer a modified gross agreement or a full-service deal so that they keep all reconciliation costs within the rent structure and avoid stretching their property management duties too thin. Something’s got to give, and Bolden thinks that medical users will have to learn to embrace the triple net lease.

The middle ground, in the meantime, is flexibility. “No one has a defined roadmap to success in the medtail world,” Chrisman noted. “People are smart by trying to design these spaces to be multiuse in many ways, so that they can adapt what their services are as they realize what the public wants.”

As medtail multiplies, making deals remains a one-off game for small investors. REITs, for instance, often can’t afford to waste time on packages that are below $10 million dollars, Bolden explained, as it takes so much of their resources to go and investigate and close on a small deal, and medtail projects mostly fit into that category.

“It’s a high-risk opportunity where you’re probably going to have to put some capital into a deal to attract a medical user who is also taking a risk to put a clinic out in a new market,” he continued. “If it is a very successful clinic, you’ve got a high return, and you’ve turned that user into a long-term tenant, as medical tenants simply do not just relocate if they’re getting referrals and business is good. That’s where the opportunity is for an entrepreneurial investor.”

The high-risk, high-reward prospect means raising your own funds and really researching the market, he continued. It’s up to small, one-off ventures to lay the groundwork, and eventually, REITs and other institutional groups may even see value in this class of risk.

Data Is Key to Medtail’s Health

Market analysis may just be the trickiest part of medtail, however. “You’re certainly going to want to be in areas where average household incomes are rising and the population is increasing, so demographics are certainly a significant piece,” Bolden said.

Tether Advisory’s 2021 Retail Healthcare Outlook found that the archetypal medtail end-user falls in the 36-50 age range. The Sunbelt and the Midwest are doing particularly well for medtail ventures so far, Wollum noted, because it’s easier to find those retail shells there, and it’s cheaper to experiment.

But beyond those broad stokes, finding the precise location for the right type of care facility, as healthcare targets an increasingly nuanced array of services and potential clients, is a challenge. “Medtail players are trying to leverage insurance data for what’s going on in that locale,” Wollum noted. “So, ‘is that submarket heavy on kidney care, or heavy on sleep issues or mental health? And they’ll kind of develop a program around that.”

Data is driving a lot of partnerships in medtail as well, he continued. “CVS, for example, bought Aetna, and we’re going to further see that alignment as all of those companies gobble up each other and things start to happen.” Walgreens is another great example, as it’s bullish on clinics through its partnership with VillageMD. It should pay off for the consumer and reinforce brand loyalty, as well, as a user’s data is more seemingly accessible to practitioners across their preferred medtail network — for everything from radiology to getting lab results to buying a knee brace.

Village Medical at Walgreens could eventually be part of 700 pharmacies across the country. (Walgreens Boots Alliance)

That data will also feed back into the real estate strategy, Wollum concluded.

Social media will also continue to play a huge part in medtail marketing, Bolden posited, much in the same way it does for retail. Digital ads and data collection will mold and market what’s hot in healthcare before it’s even a trend, similar to retail; and big healthcare systems will likely absorb new businesses and services if their metrics prove them viable.

“In retail, everyone wants to have a unique twist so that the product they’re selling stands out, because new equals excitement in the retail world,” Wollum said. That said, medtail has space for startups — everything from mineral water float spas to cryotherapy chambers to Himalayan sea salt saunas – and for established brands, like LensCrafters, for example, to integrate into the broader trend.

Eventually, successful healthcare and health-related businesses will pair together in a neighborhood tenant mix much like retail does today, Bolden concluded. No one is talking about how judicious it is to set up a Best Buy right next to a Home Depot anymore, he said, because that’s well-trodden territory in the industry. The next level of detail in medtail will be when real estate investors start talking about that kind of synergy between an orthodontist office and an SmileDirectClub store.


Author: Joe Beeton, LoopNet Editor