Malls Injecting Medical Tenants Into Vacant Spaces In Hunt For Foot Traffic
Mall owners are turning to doctors to stem the bleeding at their struggling retail centers.
Landlords are increasingly signing medical and dental tenants to fill their vacant retail spaces, capitalizing on their creditworthiness and willingness to ink long-term leases. The health systems taking the space are eager for locations more convenient for their customer base, pushing into real estate that had long been out of reach.
“I think there’s a lot of incentives to get these kinds of tenants in to drive foot traffic,” said Jilliene Helman, a board member for health and wellness center chain Next Health. “You can find a tenant to fit that space to drive traffic to augment the sales of tenants.”
The vacancy rate at U.S. malls reached a record 11.4% in Q1 2021 from 10.5% in Q2 2020, the largest quarterly spike in vacancies since 2009, according to Moody’s Analytics research reported by CNBC. Mall landlords in the past year have purchased retailers including Brooks Brothers, Lucky Brand, Forever 21 and JCPenney in order to keep storefronts open.
Urgent care facilities, MRI and radiology offices, medical laboratories and entire hospitals are filling the retail void, and their leasing velocity has increased in the past six months, said Mark Hunter, CBRE’s managing director of Americas retail asset services. Hunter, a former executive at mall owner General Growth Properties, leads CBRE’s newly formed Mall Redevelopment Team and said he’s fielding three-to-five calls a week from mall owners seeking guidance on solving their post-retail game plan.
“From an industry perspective, it’s probably hundreds of deals now,” Hunter said of medical leases at malls. “If you look at the aging baby boomer population, which I'm part of ... we’re going to need those medical facilities. I think they’re answering that demand. I think you’re going to continue to see that.”
Mall owners pursuing redevelopment today are earmarking a combined 11% of medical space and hospitals at redevelopment projects, more than the 3% slated to become distribution centers, according to a June JLL retail report.
Hunter said in his time working for a mall landlord, there was skepticism that medical and dental uses would fit well in a mall property. But he said that dissipated when he saw medical tenants ramp up their efforts to be near their patients.
Brookfield Properties Vice President of Leasing Joe Hope said the decision to accept a medical use comes down to balance, pointing to deals his company, which is the second-largest mall owner in the U.S., has done with EmblemHealth, including at the Staten Island Mall in New York.
"The formula that we look at is always a balance of kind of hitting the sweet spot for a particular shopping center for both merchandising and it has to make financial sense for us as well,” Hope said. "We want to curate the assets, the merchandising fabric of these shopping centers to provide everything the consumer needs in one roof.”
PREIT in May finalized a lease with Cooper University Health Care to occupy more than 165K SF in a former Sears at the Moorestown Mall in New Jersey, an outpatient facility expected to deliver in 2023. That same month, Macerich expanded its lease with the Saratoga Hospital at the Wilton Mall in Saratoga Springs, New York, to more than 81K SF at a former Sears to support hyperbaric medicine, podiatry services and outpatient services.
In the past, medical tenants didn't care if their real estate was cool or interesting, tucking themselves away in office buildings, said Helman, whose boutique Next Health firm offers cryotherapy and infrared treatments. It moved into a swanky redevelopment of the Century City Mall by Westfield in Los Angeles in 2018 and opened a location a year later in The Parlor in New York City, an indoor shopping center geared toward medical tenants.
“Going to the doctor is typically not the most fun thing to do,” she said. “Medicine is incredible for retail. We like foot traffic. It’s not an old dodgy doctor’s office, it’s very hip, it’s very modern. We’re trying to be able to take advantage of vacancies to grow.”
Mall locations offer tenants ample parking, easy transportation access and visibility, said Ami Ziff, the director of national retail for Time Equities, which owns millions of square feet of retail, including malls in New Jersey, Tennessee and Utah. Being near department stores and luxury shops is a plus, but not the motivation, he said.
“For the vast majority, that’s not their focus,” Ziff said. “It’s more about servicing the community in which these properties reside.”
The medical storefronts drive foot traffic pre- and post-appointments in malls from 9 to 5, Monday through Friday. An analysis by mobility data research firm Placer.ai found 22.4% of patients at national dental chain Aspen Dental’s mall locations shopped at other stores after an appointment.
Placer.ai Vice President of Marketing and researcher Ethan Chernofsky likened the medical and dental tenant appeal to singer Celine Dion, who has been performing in Las Vegas for 16 years now.
“It’s kind of a similar approach,” he said. “Are people going to travel the world to see it? Is this thing the most exciting thing? Is it a draw in itself? Maybe not. But can it work in a specific environment? Yes.”
The strategy offers an alternative to other ballyhooed mall redevelopment plans, including e-commerce distribution centers, residential and office-driven mixed-use developments and ghost kitchens. Two mall owners in Massachusetts leased former department stores to vaccine distributors earlier this year as short-term space-fillers.
Experts said they expect medical tenants to continue to sign leases at indoor malls as owners reckon with an oversupplied market. Chernofsky said the tenants will become a normal part of shopping centers the same way Tesla car dealerships and Apple stores are today.
“As much as we’re used to it now, is that a thing that made sense in a mall before it started happening?” he said. “It works so well. Really cool ideas, we no longer have to be convinced of what does and doesn’t belong in a mall.”
CORRECTION, SEPT. 7, 10 A.M. ET: A previous version of this article incorrectly identified Ethan Chernofsky's first name. This article has been updated.