By Patti Pearlberg, Coro Realty Advisors, LLC
When occupancy rates began dropping at retail centers at the start of the “great recession,” owners and operators began looking for other uses to fill their vacant spaces. Even though occupancy and rental rates have begun to tick up — increasing 30 basis points over the past 12 months according to Glickman Retail group — shopping center owners are still concerned about tenants that only sell “widgets” that can be procured in a variety of ways, including though online shopping. For that reason, they continue to look to alternative uses to maintain occupancy. Simultaneously, new urban development is trending toward mixed-use properties where medical and office uses co-exist with retail stores. Service tenants filled this gap initially, bringing hair and nail salons, fitness clubs and dry cleaners to practically every neighborhood and community shopping center. Naturally, once those needs were fulfilled, shopping center owners began looking to non-traditional uses such as office/medical tenants.
The office tenants most frequently courted by retail owners were medical because they offered services and/or experiences that can’t be purchased online. According to CCIM Institute radiology centers, dialysis centers and physical rehabilitation practices were some of the first to leave multi-story office buildings. Others looking for retail exposure include insurance offices, recruiters, financial advisors and accounting firms. These uses prefer the easy access, signage exposure and ample parking offered by retail centers. Retail owners see this as a win/win because many of these tenants not only bring shoppers that potentially benefit the more traditional co-tenants, but also often have strong credit and a willingness to sign long-term leases.
Now owners and traditional retailers must deal with the realities of office uses entering their realm, and the question becomes whether they can continue to make this trend a lasting strategy. Site planning and tenant placement become critical when adding office/medical uses to the retail center.
Pediatric practices bring moms to cross shop at the centers, but they also have very large staffs and the number of patrons spending extended time at the doctor’s office can create problems for retail customers looking for convenient parking. Managing parking for medical employees is a heavy burden on retail management. Unlike multi-tenant office buildings, retail establishments want to save the most convenient parking for customers who want a quick in-and-out. Setting the right expectations and limitations during initial lease discussions with office tenants entering the retail environment is essential to a positive long term relationship. Retail typically calls for more parking, averaging 5/1000 sf compared to office at 3.3/1000, but how that parking is used can have a huge impact on the success of retailers and the convenience factor sought by prospective medical tenants.
Odors are another problem for medical tenants in retail properties. Restaurant smells may be enticing, or at a minimum not offensive to shoppers, but they may be disturbing to patients undergoing certain types of treatment.
Expansion opportunities in retail centers are very different from multi-tenant office buildings. When retailers want to expand in a market, they typically open a new store in another location. Health care providers need the ability to expand in their current location to offer complimentary services, add physicians, or merely expand their existing practice. Medical tenants looking to relocate to a retail property need to consider what, if any, expansion possibilities exist. Likewise, landlords need to determine whether they are willing to undertake the burden of relocating tenants to accommodate medical use. Ultimately, this one issue may determine whether a healthcare provider signs a lease or not.
So, are office uses in retail centers here to stay? I would venture a strong “yes.” Consumers want access to personal services, including healthcare, in close proximity to where they live and work. They want easy in-and-out without the hassle of finding their way through parking decks and lobbies. If they are going to mingle medical/office with traditional retailers, property owners need to plan ahead and review site plans and lease documents to insure smooth transitions and operations. And to those office owners who feel they are losing a portion of their tenant base, finding ways to overcome the convenience and exposure of retail will be critical to maintaining occupancy in the future.
Patti L. Pearlberg, Esq. is vice president/partner at Coro Realty Advisors, LLC. She has over 30 years experience in commercial real estate, having worked in retail, office, industrial, multi-family and land investments. Her work encompasses asset management and law-related responsibilities, including defining ownership structures, legal drafting and documentation, zoning, financing, development, leasing, acquisitions and dispositions. She can be reached at ppearlberg@cororealty.com
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