The Medtail Revolution: Transforming Retail Real Estate
by: Cody Nakatsukasa
Unlocking a promising solution for the commercial real estate sector, medical-retail real estate, commonly referred to as ‘Medtail’, stands poised to counter the prevailing decline in retail developments. The industry is now turning its gaze towards this innovative approach, asking the pivotal question: Can Medtail be the game-changer we desperately need? This specialized asset class represents the intersection of medical office specialty use and retail commercial real estate. These developments now feature more national credit tenants and larger-scale urgent care facilities, transitioning from the smaller mom-and-pop dermatology and optometry-type clinics that once occupied the majority of these spaces. With retail becoming such a distressed asset class in a post-COVID era with the rise of E-commerce alternatives, there are questions as to how to keep demand for retail space up. This specialized asset could be an answer.
Prior to the global upheaval caused by the pandemic, the retail real estate market had been witnessing a noticeable decline in available capital, signaling a departure from the robust funding prevalent in the early/mid-2000s. This shift, marked by waning interest in conventional retail spaces like enclosed malls and shopping centers, had already begun to unfold. Against the backdrop of this challenging retail climate, the dynamics of financing for retail developments, renovations, and acquisitions faced constraints, yet still served as a stable product type for investors.
However, as the pandemic accelerated the shift towards E-commerce, traditional retail spaces faced unprecedented challenges. According to the 2023 United States Census Bureau Quarterly E-Commerce sales report, E-commerce sales accounted for around 15.6% of total sales in the third quarter of 2023 (5). Foot traffic plummeted, with shoppers preferring online, no-contact alternatives, leading to store closures and bankruptcies. This turmoil had a profound impact on the perception of retail as an investment, turning many lenders and investors more cautious. This was coupled with the recent hikes in federal interest rates to combat inflation, making lending terms less favorable. Vacancy rates in retail markets across the country have skyrocketed, with one of the largest jumps being in Dallas, increasing vacancy by around 21.31% according to the Federal Reserve Bank of Atlanta (3). Other major markets including Los Angeles, New York, and Philadelphia all saw around an 8-10% increase in retail vacancy.
‘Medtail,’ the fusion of medical office and traditional retail, is rapidly gaining prominence as it reshapes the retail landscape. It offers resilience in the face of E-commerce, as healthcare services remain immune to digital disruption, ensuring consistent demand and foot traffic. The inclusion of healthcare tenants diversifies the tenant mix, providing stability and financial predictability for property owners. These tenants are also largely part of a demographic of medical practice known as traditional alternative medicines, including practices such as massage, chiropractics, and meditation, an industry that has grown in employment by double, increasing from 60,000 to 120,000 employees in the space according to the U.S. Bureau of Labor Statistics (1). Adaptive reuse of vacant retail spaces for ‘Medtail’ purposes addresses oversupply issues while catering to the growing need for accessible healthcare facilities.
Furthermore, ‘Medtail’ fosters community-centric experiences, creating destination shopping hubs and appealing to investors seeking reliable, long-term income streams. According to NAIOP, “The era of monumental health care facilities (mega-hospitals and sprawling campuses) is coming to an end. They are not consumer-friendly and tend to be an unpleasant clinical experience” (4). Smaller ‘Medtail’ offices and community-centric projects offer a more personal and less institutional feel to the patient experience that has become sought after in a post-digital world.
Looking ahead, the future of capital availability in ‘Medtail’ real estate is poised for growth. A compelling real-world example of such potential is evident in Black Salmon & The Allen Morris Co.’s ambitious new development plan in Highland Park Miami. This $1 billion, 7-acre mixed-use project, announced at the end of September, aims to expand the Miami Medical District (6). Encompassing 500,000 square feet of medical office/retail, a hotel, residential units, and ground-floor retail, the joint venture seeks to establish a walkable medical community. Projects like this underscore the integration of Medtail into diverse product types and highlight its evolving role within urban ecosystems.
Drawing on our extensive expertise in the retail sector for both value-add and ground-up development, we are able to procure the best available capital solutions to suit any Medtail project. Empower your investment journey by partnering with Lever Capital Partners and allow us to leverage our network and experience to find the capital for your next real estate project.
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