By Jim Tancredi and Tyler Foresta of LMT Commercial Realty, LLC
As the effects of the pandemic continue to wane, we are observing trends in leasing that will impact the retail sector in 2023. Many restaurants and retailers, including service providers, are modifying their business models to navigate the new challenges precipitated by the pandemic. Additionally, recent shifts in local demographics such as the significant increase in Delaware’s population since the onset of the pandemic, are meaningfully impacting the demand for retail, hospitality, and entertainment sectors in this market.
These changes in market conditions are forcing landlords to reconsider their leasing strategies. In many cases the landlords are selecting users that best serve the needs of the residents living close by their centers. One genre of the retail market that is noticeably more present than ever, is the medical service provider segment. A push towards the placement of medical-related tenants in local community centers is having a substantial effect on tenant mix and positioning of those tenants, in many retail projects.
The slowdown in traditional retail sales like soft goods, hardware, housewares, etc., triggered by COVID-19 shutdowns, led to a significant decline in demand for traditional community center retailers. Decreased demand resulted in more retail center vacancies, as well as an increase in surviving tenant requests for substantial rent reductions to adjust for their reduced sales. The increased vacancy and requests for traditional tenant rent concessions, opened the door for an emerging trend in retail: The Medical Use Retail Tenant. Medical practitioners are seeing the influx of new prospective patients with the migration of population out of regional city centers as the population shifts towards more suburban living. In Delaware, this population shift is primarily the result of larger city residents trading expensive city-life for a less expensive suburban lifestyle in smaller, less densely populated areas. Residents of these nearby cities, and even the densely populated suburbs surrounding them, are escaping to Delaware by the thousands to take advantage of a litany of favorable items such as lower taxes, more affordable real estate, and far less congestion when compared to the cities they are leaving behind.
Retail centers are now viewed by medical practitioners as viable alternative to medical complexes with easy access, parking, and good high visibility advertising. We are seeing everything from physical therapy, dentists, chiropractors, imaging centers, and renal care, to even more intensive primary care doctors, urgent care services, and even surgicenters that provide convenient outpatient surgical options for patients in communities that are near these retail centers.
In summary, these changes benefit landlords in three different ways: First and most obvious, they decrease their vacancy rates. Second, they are assisting the market in meeting the demand for convenient medical services in their communities. Lastly, medical related tenants typically afford higher rental rates compared to standard retail tenants. The higher rental rates paid by these users corresponds to the fact that there will always be a need for medical services, and most medical practitioners take health insurance for payment, meaning the practitioners can typically rely on a steady stream of annual revenue regardless of economic conditions. Plain and simple, medical related tenants offer a landlord more stability compared to that of many traditional retail tenants.
Jim Tancredi is a Principal at LMT, and Tyler Foresta played a key role in the launch of LMT and works primarily with sales and leasing. LMT Commercial serves real estate investors, property owners, tenants and restaurant owners and operators throughout the Mid-Atlantic.