Struggling malls find new life as medical facilities

Brick and mortar retail stores have been on the decline for the last decade. As consumers have become more willing to make purchases online and e-commerce vendors have enhanced the online experience, the need for and desire of the general public to travel to malls or stand-alone retail stores has fallen significantly. Unfortunately for retailers, the onset of the worldwide COVID-19 pandemic expedited the decline of brick-and-mortar stores as malls and shopping centers closed due to public safety concerns. Consumers who had not used e-commerce had no other options but to become familiar with the concept. Fast forward to a couple of years living with the pandemic and there are still lingering concerns by consumers about shopping in public.

Business restrictions brought on by COVID-19, both mandatory and voluntary, pushed many malls and shopping centers out of business. Across the country, entire malls or significant portions thereof have become vacant and there is no reason to believe this trend will not continue. A study done by Moody’s Analytics entitled “COVID-19 and the Convergence of Retail and Industrial” from 2020 reported that millions of square feet of retail space is expected to become available in the next few years. Reduced foot traffic in retail spaces created a new challenge for malls and shopping centers, trying to find new and creative ways to attract and keep customers. To meet this challenge, property owners located a need in the marketplace and created an innovative approach, bringing in health care facilities, dental offices, and hospitals to the mall and shopping centers.

Filling the space at malls and shopping centers with various types of medical uses, from outpatient clinics to ancillary services, such as dialysis, women’s health, imaging, and physical therapy, highlights a natural synergy between typical mall or shopping center tenants and health care providers. This hybrid model has the potential to enable hospital-based systems to deliver care more effectively, efficiently, and to help address health care inequities and constantly evolving public health needs while promoting local economic development.

For malls and shopping centers, bringing in health care clinics and hospitals will not only repopulate empty square footage but contribute to foot traffic for the shops and service businesses remaining in the mall or shopping center. These hybrid facilities have the added benefit of being able to draw additional visitors during slower daytime hours. For example, Vanderbilt University Medical Center took over the One Hundred Oaks mall located in Nashville, Tenn., which now houses 22 specialty clinics in approximately 500,000 square feet.

Seizing upon this unique opportunity, medical facilities have become aware that the design and location of malls make them an ideal choice to be retrofitted for medical purposes. Due to advances in medical technology, many procedures that once required hospital stays are now performed on an outpatient basis. Medical facilities see value in retail mall and shopping centers that offer visibility and accessibility. Malls typically have easy access to major highways and are in close proximity to densely populated areas which could provide easier access to a larger pool of patients. The voluminous square footage of malls can provide medical facilities with the ability to house many different specialties under the same roof, adding convenience and accessibility for patients. Moving services from a hospital’s campus to a nearby mall frees up valuable square footage in crowded hospitals.

The cost savings for medical facilities are also quite substantial, as it is less expensive to retrofit existing malls than expand existing medical facilities that are constrained by their physical footprint. The malls’ infrastructure – such as plumbing and electrical systems – is expansive enough to absorb the needs of medical facilities, which make the properties easily adaptable for use by providing an additional cost savings for health care facilities as well as the ample existing parking areas. These potential expansion options can lower a hospitals’ fixed costs by reducing dependency on inflexible infrastructure and may allow hospitals and other providers to reduce variable costs through a variety of shared services available to all medical facilities at a repurposed mall. Such shared services may include a centralized IT center to handle technology needs with a retail component to serve outpatients who use medical devices, a telehealth center equipped with advanced technology paid for on a per-use or membership basis, and a wholesale medical supply and pharmacy minimizing the need for decentralized stockpiling.

The conversion trend to a medical mall continues to gain momentum especially in light of the ongoing pandemic. A national database maintained by Georgia Tech urban design professor Ellen Dunham-Jones, cited a total of 32 enclosed medical malls that have been transformed into health care facilities, approximately one-third of which were the result of the pandemic. As mall owners and health care facilities continue to work together, the inherent synergy between medical and retail services may facilitate the growth of a hybrid model in which both retail and medical facilities are provided in the same facility. This type of hybrid model has already been employed by the pharmacy CVS inclusion of medical clinic services in its stores, which has been met with success.

With the aging baby boomer population, investment in new, more contemporary and localized medical offices at hybrid facilities makes a great deal of financial sense. Mall owners are diversifying their tenant mix and health care providers are enhancing patient convenience, a health outcome for both parties. This new intersection of health care and retail space can act as an economic engine creating job opportunities and revitalizing underserved communities. Brick-and mortar business still have immense value, from brand exposure to in-person product experience to new iterations as health care destinations. A medical mall can serve a local community and re-energize the business model of a local or regional hospital-based health system.

James Ko is an associate with Brach Eichler LLP, where he focuses his practice on complex health care transactional and regulatory matters. Brian Peykar, counsel at the firm, represents real estate developers, investors and lenders in a wide range of commercial real estate transactions, including multifamily, office, industrial and retail projects.