Leasing Retail Space for Medical Office Use

As consumer demand shifts towards faster and more convenient medical services many healthcare providers are taking a closer look at leasing retail space for medical office use. This can be a great strategy for medical office users however as they evaluate retail locations it’s important that they consider a few things.

Retail Properties Infrastructure May Not Be Acceptable

Retail shopping centers were built for the traditional retail tenant. The cost to build a retail building is less than a medical office building as medical office buildings require more infrastructure. Medical office users such as urgent cares, surgery centers, clinics, etc., have vastly different needs than a retail store. For example the mechanical, electrical, plumbing, and HVAC requirements may not meet medical office standards.

Tenant Mix

A high traffic shopping center may look like a great location for a medical office however you need to evaluate the impact that the tenant mix could have to parking and getting into and out of the retail center. Do you want to be next to a major grocery store or next to a big box retail tenant that generates a ton of street and parking lot traffic? There are some benefits however those may not be not as desirable as a smaller retail strip center that has more convenient parking. As consumers focus more on convenience and less on the provider it’s important that you look at easy ingress and egress.

Ideally you want to be located in a retail center with somewhat comparable tenants. Being next to a Planet K may give your medical office a negative image. Looks for locations that have tenants that you think your clients respect and use.

Parking

Convenient parking is one of the main reasons you would consider leasing retail space for medical office use as this will enhance the patients overall experience. Easy in and easy out. Look for highly visible, smaller shopping centers in densely populated neighborhoods with above standard demographics. If you lease space in a large shopping center or big box power center your patients may have to compete for parking spaces and since those are mainly found on major thoroughfares getting to and from may take longer.

Tenant Improvements Costs are Higher

Medical office property owners are more familiar with the build-out requirements of medical users and typically offer larger tenant improvement allowances. Shopping center owners are not familiar with medical office buildouts and don’t typically provide as much allowance. Medical officer users have a great demand for landlord funded tenant improvement allowances which can make things challenging.

Medical office buildouts typically range from $70 to $150 sf and this does not include FF&E. When negotiating a lease for medical use in a retail shopping center you may have to sign at least a 7-10 year lease to get an allowance equal to what you would from a medical office building owner. 

Lease Contract

Retail lease contracts are different from medical office leases and fail to address the key components of medical tenancy.  Most retail leases will be boiler plate and focus on retail tenants. Below are a few things to consider when evaluating a retail lease contract for medical office use. 

Permitted Use – there maybe a clause in the lease that does not allow medical use which would need to be stricken entirely. Medical tenants would also want to ensure that they can get an exclusive and that no other tenant has an exclusive that would prevent medical use. For example Walgreens or CVS may have an exclusive right to medical services.

Power & Compliance – Some medical tenants may have higher electrical needs (e.g. X- ray machines, CT scans, MRI, and other diagnostic equipment) or back up generator needs so it’s important to ensure you have language that defines and allows this. Also, medical tenants have HIPPA and other standards to adhere to so make sure the retail shopping center contract addresses this in detail.

Relocation clause – Its common for retail leases to have a relocation clause that allows the landlord to relocate them if needed. Because of the cost of a medical office buildout any relocation clause should be stricken from the lease.

Liens – Many healthcare practices finance improvement costs as well as medical equipment and other FF&E. Therefore make sure that the landlords lien rights are subordinate to the tenants.

Restoration – Some leases may have a clause that requires a retail tenant to restore the space to original condition before they move out. As a medical office user you want to strike this request.

Privacy – Retail landlords typically negotiate the right to enter the space to show prospective tenants or ensure compliance with the lease and/or make repairs. Healthcare providers need to limit this access to exam rooms and patient record rooms.

At the end of the day you need have a real estate attorney that specializes in medical office spaces review the lease. Healthcare providers have unique needs and before leasing retail space it’s important that you ensure the retail location can accommodate your current and future medical space needs.