Retail space agents, desperate for tenants, have been turning to medical clinics to help fill the voids.
The medical office market is not exactly booming, but it has been relatively stable as providers, landlords and patients bide their time to see what, if any, effects the health care reforms enacted last year will have on the local market.
In the meantime, the most noticeable change in medical real estate has been the phenomenon of health care providers seeking more space in retail settings -- an opportunistic move to both take advantage of depressed lease rates in the vacancy-plagued retail sector and also serve to give providers an edge up in the scramble for new patients.
On the whole, medical real estate is divided into two broad categories: off-campus and on-campus. The off-campus designation describes free-standing medical office buildings, or MOBs, usually owned not by health care companies but by private investors such as real estate investment trusts. On-campus usually refers to MOBs frequently owned by and attached to hospitals.
According to numbers compiled this summer by Minneapolis-based NorthMarq Real Estate Services, the on-campus sectors showed a modest "positive absorption," or the decrease in vacant space, thanks largely to 40,000 new square feet of occupied office space on the Abbott Northwestern Hospital campus in Minneapolis, part of Children's Hospitals and Clinics of Minnesota's expansion.
The on-campus vacancy rate was at 8 percent, compared with a metro-wide office vacancy rate of 19.9 percent. New on-campus projects are on the books but have largely been shelved because of a combination of tight financing, a lack of cash on hand and a dwindling supply of new physicians coming into the system to support new development, NorthMarq said.
For off-campus medical space, meanwhile, the vacancy rate stood at 14.9 percent. And while tenants are doing some shifting around, there has been little positive absorption in the MOB market. Lease rates are down and landlord concessions are up along the Southdale/France Avenue MOB corridor.
One reason off-campus properties aren't doing better is that they're facing competition from the abundant vacant space in traditional retail settings. Retail landlords, dealing with their own recession-bred crisis, are doing whatever they can to lure health care providers into storefronts, despite financial and logistical challenges posed by such moves, said Steve Brown, senior vice president and managing director of NorthMarq's Healthcare Advisory Group.
'A unique opportunity'
"It probably isn't a trend so much as a unique opportunity that has presented itself to health care providers," he said. "This kind of option hasn't been available to them before. Now that the retail sector is in the tank, landlords are more willing to look at alternative uses such as health care even though there are risks in it for them."
There have been several high-profile examples of the trend, as well as an array of smaller-scale deals so far this year. Probably the most visible is a decision by the Emergency Physicians Professional Association (EPPA), a group of Twin Cities physicians who staff six area hospital emergency departments, to open the Urgency Room at the Woodbury Village shopping center.
EPPA announced last month that it would take a 10,000-square-foot retail site at the mall to set up an emergency room catering to those with non-critical illnesses that it says will offer these same level of treatment available at East Metro hospitals but at lower costs and with shorter waiting times.
Another example is Partners in Pediatrics, which recently took a 7,000-square-foot space in the retail portion of the Ellipse, a St. Louis Park mixed-use apartment/retail development on Minnetonka Boulevard.
And in Maple Grove, where medical office buildings near the Maple Grove Hospital are leased at capacity, health care providers have been spreading out into surrounding retail centers.
But, experts say, there are both costs and benefits of being in retail settings.
The main benefit is visibility for the provider and convenience for patients. Storefronts offer advantages that traditional on-campus settings can't, such as big signs over the front door and foot traffic from other retailers.
Perhaps nothing illustrates the desire of health care providers to take their services "where the patients are" more so than the move by the Mayo Clinic to include a "gateway" facility in the Mall of America's long-planned second phase.
"This project builds on Mayo Clinic's tradition of innovation by focusing on the needs of the patient," CEO Dr. Glenn Forbes said when the concept was unveiled last year. "Mayo strives to create greater value for patients by developing care delivery models based on what patients want and need."
Among the drawbacks, NorthMarq's Brown said, is that while medical tenants may sign longer leases than traditional retail tenants, retrofitting storefronts for health care users frequently amounts to "miniature build-to-suits" involving significant infrastructure work that locks in the space for medical use.
That, he said, can be a problem for a retail landlord whose ultimate aim may be to simply wait out the sluggish economy for a rebound in traditional store demand.
Don Jacobson is a St. Paul-based freelance writer.