Phoenix Retail and Medtail Zoom from Doom to Boom

September 16, 2024

Phoenix Retail & Medtail Zoom: From Doom to Boom

In the days of the Covid pandemic, the industrial and multifamily sectors were popping, while retail appeared to be in a doom spiral along with office space. (For a reminder of how dire the situation appeared to be, check out our post from July 2020: The Great Acceleration: Has COVID-19 Changed Retail for Good?) Were we ever going to shop in public again? Had online commerce made bricks and mortar stores obsolete? As time passed, like the old Mark Twain saying, it became obvious that the tales of retail’s death had been greatly exaggerated. Today, with people clamoring for in-person goods, services, and restaurants like never before—investors are hot on the case. 

Limited inventory and minimal construction are keeping the pricing of existing retail up, with high prices per square foot and decently low cap rates. A look at the metrics tells the story of Phoenix retail leadership on a national level in the new boom:

  • Vacancy has proven to be very healthy, hovering around the 5.2% range.
  • One of the key statistics to consider in commercial real estate is the percentage of current inventory that is under development. Retail has just 1.18% of the current inventory under development—far less than multifamily or industrial. This is good for retail absorption and indicates that the Phoenix market will not suffer from high vacancy rates anytime soon.
  • Year-over-year rent growth of 7.1% proves significant retail demand. Just as multifamily and industrial experienced record rent growth a few years ago, retail is having its moment. Phoenix is also outperforming the national average of retail rent growth, which is just over 2%.

Although there is not much retail development overall, the locations where it’s occurring are highly strategic. Two of the major players in the Greater Phoenix development space, DMB and Vestar, are in the process of developing Verrado Marketplace, a 500,000-square-foot, upscale location with major tenants such as Target, Harkins, Ross, and a variety of restaurants.

Medtail Becomes a Boom within a Boom

Ten years ago, the idea of getting a physical exam or MRI and picking up groceries without having to leave the parking lot would have sounded crazy. But the reality of the so-called medtail movement—medical in a retail location/center—has made it common. Traditionally, a hospital was an anchor location, and then all the doctors affiliated with it would have their medical offices within the same overall complex, along with offices focused on testing and medical imaging. 

At first, physicians may have felt like it was déclassé to set up a practice in a non-medical retail location, but ultimately, it was a business decision to get closer to the consumer base. The rise of medtail received a further boost during the pandemic, just at a time when retail vacancy rates were a major concern. In many cases, medtail also makes sense from an infrastructure perspective, an option for backfilling a former CVS, Walgreens, or even Bed Bath and Beyond with medical tenants who do not need to be in a hospital setting or cannot afford the time and expense of a ground-up, build-to-suit development.

While the types of medtail product include brands such as Village Medical, they also stretch beyond primary care into other categories—for example, Mind 24-7 mental health walk-in clinics, Pacific Dental and Risas Dental and Braces. Veterinary clinics and urgent care also fall under the medtail umbrella. 

Note, too, that landlords and other retailers within a medtail complex experience follow-on benefits, such as more tenant diversity and increased foot traffic

Meeting the Challenges of Medtail

As with any highly competitive trend—especially one that involves repurposing of existing properties—medtail requires creative thinking in order to be successful. According to the American College of Healthcare Architects, some of the challenges for converting spaces include retrofitting floor plans, increasing natural light, addressing utilities, and structural changes.

The bottom line: Retail’s current boom extends far beyond the traditional rotation of restaurants, services, and merchandise. Medtail concepts are often high performing with outstanding financials—whether a veterinary clinic or an urgent care in a strip center. Investors should be open to investigating their options and including them in potential acquisitions.

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