Malls, shopping centers filling vacancies with health care tenants

 

The doctor is in. 

The new shoes, clothes and housewares displayed for sale are out. 

The evolution of retail that has left large blocks of empty space in Long Island’s malls and shopping centers after the exits of Lord & Taylor, Sears and other stores is providing opportunities for health care providers, which are spending millions of dollars snapping up and renovating the spaces for expansions.

NYU Langone Health, Catholic Health, Stony Brook Medicine and Northwell Health are among the medical systems that have leased former department stores or other large retail spaces where they plan to open new medical facilities in the next 12 months.

But the region’s biggest medical occupant of former retail space, at least as of 2022, was CityMD, the largest operator of urgent care centers in New York state. 

Last year on Long Island, CityMD occupied former retail space, mostly in shopping centers, that totaled 177,320 square feet, which was more than 16 times as much as the 10,483 square feet it occupied a decade earlier, according to the CoStar Group Inc., a Washington, D.C.-based provider of commercial real estate information.

The reasons that health care providers are moving into more malls and shopping centers include the growing need for medical care for a population that is skewing older, the cost-effectiveness of moving into existing spaces rather than building new facilities, plenty of free parking, and some retail landlords offering more-flexible lease terms than they would have in the past to fill vacancies.

Another factor: Since the pandemic began in 2020, the federal Centers for Medicare & Medicaid Services has been allowing more flexibility in how and where health care providers could offer telehealth services, which accelerated the openings of clinics in strip malls, said Nancy Foster, vice president for quality and patient safety policy at the American Hospital Association, a Chicago-based trade group.

“I think it opened our eyes for ways in which we could care for patients effectively,” she said.

Also, health care providers are attractive tenants because they tend to stay put, unlike brick-and-mortar stores that lose customers to online retailers and declines in the economy.

“Medical offices and grocery stores are recession-proof in a lot of ways,” said Thomas LaSalvia, a senior economist at Moody’s Analytics CRE, a Manhattan-based real estate information provider.

In fact, while the total amount of square footage at malls and shopping centers on Long Island increased by 5.8% to 155.9 million square feet between 2012 and 2022, the amount of that space that was occupied by medical tenants grew by 1,313%, from 88,249 square feet to 1.25 million square feet during that period, according to CoStar.

There is also the potential property tax savings for some landlords.

Under New York state law, properties that are occupied by nonprofit tenants with leases that are at least 30 years in duration may qualify to be classified as “leasehold condominiums,” which are exempt from property taxes.  That is the case with a former Sears at Smith Haven Mall in Lake Grove that Stony Brook Medicine has leased for a new medical facility.

One of the reasons health care providers are drawn to retail spaces is that they can fill gaps in care by providing convenient locations near patients’ homes, particularly in Nassau County, some parts of which have tight office spaces with insufficient parking, health care providers and retail experts said.

“And, so, we actually have a number of sites that have been part of retail conversion to meet patients where they are, in the communities where they live,” said Christine Flaherty, senior vice president of real estate and facilities management at Catholic Health.  The health system plans to open a 63,000-square-foot ambulatory and urgent care center this summer in a leased space formerly occupied by discount retailer Ocean State Job Lot in Centereach.

It wasn’t long ago that health care providers weren’t receptive to retail landlords trying to pitch their vacancies to them, said Greg Gerber, senior managing director for JLL, a Chicago-based commercial real estate firm.

But that has changed since the No. 1 issue in health care now is how to control and reduce costs, he said.

“There is downward pressure on costs in health systems, like there hasn’t been in a decade probably,” he said.

Health care facilities have a high demand on power, heating, air conditioning and ventilation systems, and vacant department store spaces have the “basic bones” needed for large medical facilities, such as strong floors that can bear the weight of heavy equipment, and the extensive electrical and mechanical systems it takes to run a medical facility, he said.

“So, the cost of delivering the box to the health system is less expensive than for a health system to build new — significantly less expensive,” Gerber said.

Furthermore, retail landlords often will give the health care tenants a “tenant improvement allowance,” which is cash given to the tenant to make needed improvements to the leased properties, but the health care tenants likely will spend more than the allowance, often much more, to get the spaces ready. 

This creates a “sticky tenant,” which is a tenant that stays long-term by continuing to renew the lease instead of leaving after it expires, Gerber said.

Health care providers are taking advantage of favorable lease terms in former retail spaces, while landlords are courting health care providers because they are stable, credit-worthy tenants who will bring foot traffic to the stores and restaurants on their properties.

Owners of malls and shopping centers might have different motivations for which potential tenants they solicit these days.

For one thing, underperforming malls that have had trouble filling vacant leases are in a more desperate position than ever before, so they are forced to search for tenants that are outside of the norm, said David Caputo, data scientist at Moody’s Analytics.

“Mall owners also must be more generous in lease negotiations, whether that means more tenant improvement, more free rent or lower rent,” he said.

But the story for shopping centers is different because as the rate of new construction has decreased, the spaces are still in demand due to the lack of new supply, he said.

This can be seen as current shopping center rents for Long Island have only decreased 1.3% from pre-pandemic prices, going from $29.08 to $28.71 per square foot, Caputo said.

“Similarly, shopping center vacancies … also rebounded nicely from the pandemic as vacancies are currently 8.6%, which is down from 9.0% at the start of the pandemic,” he said.

Two of the biggest retail landlords leasing vacant department store space to medical tenants on Long Island are Steel Equities, a Bethpage-based real estate developer that has bought three former Sears buildings on Long Island since 2018, and Hudson’s Bay Co., the Toronto-based parent company of defunct high-end retailer Lord & Taylor.

Lord & Taylor was the nation’s oldest department store chain when it filed for Chapter 11 bankruptcy protection in 2020, citing the COVID-19 pandemic as a major reason.  The retailer closed all 38 of its stores, including the four on Long Island, the same year.

 Of the 29 former Lord & Taylor properties that Hudson’s Bay owns nationwide, about 20% are in the process of being converted to medical offices, including three on Long Island, said Doug Adams, senior vice president of development at Hudson’s Bay.

The buildings average 120,000 square feet on two levels and have ceiling heights of 16 feet to 22 feet, he said.

Hudson’s Bay has a strong real estate portfolio located in prime areas but it is not rushing to lease the spaces since the tenants have to be the right fit, he said.

Tenants being considered are in the medical, life sciences, office services, entertainment and other uses adjacent to retail, he said.

“Right now, the medical field is the number one generator of demand.  So, it’s really the industry that’s growing … There’s more [medical] tenants, more groups in the market looking for space,” he said.

In August 2021, Hudson’s Bay announced that it was partnering with co-working company WeWork to turn some former Lord & Taylor spaces, including the one at 1440 Northern Blvd. in Manhasset, into SaksWorks, a membership-based co-working space with offices and other components. 

But now NYU Langone Health, which has 700,000 square feet of new ambulatory care clinical projects under development in former retail, or mixed-use spaces, on Long Island, has signed a 30-year lease for the entire 161,726-square-foot, three-level building in Manhasset.

The facility will offer ambulatory surgery, endoscopy, a large physician office practice with about 75 physicians and 65 exam rooms, and a full-service imaging center with MRIs, general and breast ultrasounds, mammography, X-ray, and other services, said Andrew Rubin, senior vice president of clinical affairs and ambulatory care at NYU Langone Health. He said it was too soon to provide the expected opening date.

At the former Lord & Taylor in Garden City, at 1200 Franklin Ave., two tenants have leased the space: Northwell Health will be taking the first floor for an 80,000-square-foot ambulatory medical center, while Morgan Stanley is taking the second floor.

Hudson’s Bay also plans to convert its former Lord & Taylor at the Walt Whitman Shops in Huntington to medical offices.

The company submitted a site plan application to the town in September to convert the 119,836-square-foot,  two-level former department store to medical offices but no approvals have been granted yet, a town spokeswoman said.

Steel Equities, which did not respond to Newsday’s requests for comment, owns the former Sears and a vacant Sears Auto Center building at Smith Haven Mall in Lake Grove, a former Sears in Garden City and one in Hicksville.

This spring, the former Sears in Lake Grove will become home to Stony Brook Medicine Advanced Specialty Care at Lake Grove, which “will offer convenient, quality medical care in a modern, open-concept layout occupying more than 170,000 square feet,” said Dr. Todd R. Griffin, Stony Brook Medicine’s vice dean for clinical affairs and vice president of clinical services.  

The building will be a relocation and consolidation of  about 25 separate offices and 40 to 50 specialty practices from Stony Brook Technology Park in East Setauket, about a mile from Smith Haven Mall, he said.  The moves will be phased in over five years, starting in May.  By 2027, about 1,000 Stony Brook Medicine employees will be working at the mall site, Griffin said.

The benefits of the large building include its plentiful parking and high visibility.  It’s also easier to access by bus — a large percentage of Stony Brook’s patients reside in underserved communities and may not have cars  — so the move aligns with the nonprofit’s mission, he said.

“We’re a state safety net hospital.  Not all the others are … We see everybody whether  you have insurance or don’t have insurance,” Griffin said.

The Lake Grove location also will allow for better coordination of care for patients with multiple medical problems because they can have “one-stop shopping” for their health care needs, he said.

Not only will Stony Brook save money by providing economies of scale by locating staff and supplies under one roof, but there will also be significant saving in lease consolidation, he said.

As for the former Sears in Garden City, NYU Langone Health will open an ambulatory care center in the leased space this fall, Rubin said.  The four-level, 260,000-square-foot, free-standing building is at 1111 Franklin Ave.

Meanwhile, Northwell Health, the largest health care provider in New York state, has a 5,000-square-foot pediatric center under construction in a former Mattress Firm store at 187 Sunrise Highway in West Islip, Northwell spokesman Jason Molinet said.  The facility is expected to open in the fourth quarter of this year, he said.

In October, Northwell opened a $1.8 million, 9,428-square-foot multidisciplinary practice in a former strip mall at 4070 and 4072 Hempstead Turnpike in Bethpage.  The health care provider also opened a Sports Therapy and Rehabilitation Services site in 4,000 square feet of shopping center space at 9A Hewitt Square in East Northport in December.

“Northwell is dedicated to bringing innovative health care closer to home for our patients. Retail sites routinely provide the necessary requirements for medical space: proximity to our patients, parking and signage,” Molinet said.

The doctor is in.

The new shoes, clothes and housewares displayed for sale are out. 

The evolution of retail that has left large blocks of empty space in Long Island’s malls and shopping centers after the exits of Lord & Taylor, Sears and other stores is providing opportunities for health care providers, which are spending millions of dollars snapping up and renovating the spaces for expansions.

NYU Langone Health, Catholic Health, Stony Brook Medicine and Northwell Health are among the medical systems that have leased former department stores or other large retail spaces where they plan to open new medical facilities in the next 12 months.

But the region’s biggest medical occupant of former retail space, at least as of 2022, was CityMD, the largest operator of urgent care centers in New York state. 

Last year on Long Island, CityMD occupied former retail space, mostly in shopping centers, that totaled 177,320 square feet, which was more than 16 times as much as the 10,483 square feet it occupied a decade earlier, according to the CoStar Group Inc., a Washington, D.C.-based provider of commercial real estate information.

The reasons that health care providers are moving into more malls and shopping centers include the growing need for medical care for a population that is skewing older, the cost-effectiveness of moving into existing spaces rather than building new facilities, plenty of free parking, and some retail landlords offering more-flexible lease terms than they would have in the past to fill vacancies.

Another factor: Since the pandemic began in 2020, the federal Centers for Medicare & Medicaid Services has been allowing more flexibility in how and where health care providers could offer telehealth services, which accelerated the openings of clinics in strip malls, said Nancy Foster, vice president for quality and patient safety policy at the American Hospital Association, a Chicago-based trade group.

“I think it opened our eyes for ways in which we could care for patients effectively,” she said.

Also, health care providers are attractive tenants because they tend to stay put, unlike brick-and-mortar stores that lose customers to online retailers and declines in the economy.

“Medical offices and grocery stores are recession-proof in a lot of ways,” said Thomas LaSalvia, a senior economist at Moody’s Analytics CRE, a Manhattan-based real estate information provider.

Long Island retail space occupied by health care providers has increased more than ten-fold in the past decade from 88,249 sq. ft. to 1.25 million sq. ft.

In fact, while the total amount of square footage at malls and shopping centers on Long Island increased by 5.8% to 155.9 million square feet between 2012 and 2022, the amount of that space that was occupied by medical tenants grew by 1,313%, from 88,249 square feet to 1.25 million square feet during that period, according to CoStar.

There is also the potential property tax savings for some landlords.

Under New York state law, properties that are occupied by nonprofit tenants with leases that are at least 30 years in duration may qualify to be classified as “leasehold condominiums,” which are exempt from property taxes.  That is the case with a former Sears at Smith Haven Mall in Lake Grove that Stony Brook Medicine has leased for a new medical facility.

One of the reasons health care providers are drawn to retail spaces is that they can fill gaps in care by providing convenient locations near patients’ homes, particularly in Nassau County, some parts of which have tight office spaces with insufficient parking, health care providers and retail experts said.

“And, so, we actually have a number of sites that have been part of retail conversion to meet patients where they are, in the communities where they live,” said Christine Flaherty, senior vice president of real estate and facilities management at Catholic Health.  The health system plans to open a 63,000-square-foot ambulatory and urgent care center this summer in a leased space formerly occupied by discount retailer Ocean State Job Lot in Centereach.

Renderings of the planned Catholic Health Ambulatory & Urgent Care at Centereach, a new multi-specialty practice that will open in a former Ocean State Job Lot space in a shopping center this summer. Credit: Catholic Health

A change of heart

It wasn’t long ago that health care providers weren’t receptive to retail landlords trying to pitch their vacancies to them, said Greg Gerber, senior managing director for JLL, a Chicago-based commercial real estate firm.

But that has changed since the No. 1 issue in health care now is how to control and reduce costs, he said.

“There is downward pressure on costs in health systems, like there hasn’t been in a decade probably,” he said.

Health care facilities have a high demand on power, heating, air conditioning and ventilation systems, and vacant department store spaces have the “basic bones” needed for large medical facilities, such as strong floors that can bear the weight of heavy equipment, and the extensive electrical and mechanical systems it takes to run a medical facility, he said.

“So, the cost of delivering the box to the health system is less expensive than for a health system to build new — significantly less expensive,” Gerber said.

Furthermore, retail landlords often will give the health care tenants a “tenant improvement allowance,” which is cash given to the tenant to make needed improvements to the leased properties, but the health care tenants likely will spend more than the allowance, often much more, to get the spaces ready. 

This creates a “sticky tenant,” which is a tenant that stays long-term by continuing to renew the lease instead of leaving after it expires, Gerber said.

Health care providers are taking advantage of favorable lease terms in former retail spaces, while landlords are courting health care providers because they are stable, credit-worthy tenants who will bring foot traffic to the stores and restaurants on their properties.

Owners of malls and shopping centers might have different motivations for which potential tenants they solicit these days.

For one thing, underperforming malls that have had trouble filling vacant leases are in a more desperate position than ever before, so they are forced to search for tenants that are outside of the norm, said David Caputo, data scientist at Moody’s Analytics.

“Mall owners also must be more generous in lease negotiations, whether that means more tenant improvement, more free rent or lower rent,” he said.

But the story for shopping centers is different because as the rate of new construction has decreased, the spaces are still in demand due to the lack of new supply, he said.

This can be seen as current shopping center rents for Long Island have only decreased 1.3% from pre-pandemic prices, going from $29.08 to $28.71 per square foot, Caputo said.

“Similarly, shopping center vacancies … also rebounded nicely from the pandemic as vacancies are currently 8.6%, which is down from 9.0% at the start of the pandemic,” he said.

Big holes to fill

Two of the biggest retail landlords leasing vacant department store space to medical tenants on Long Island are Steel Equities, a Bethpage-based real estate developer that has bought three former Sears buildings on Long Island since 2018, and Hudson’s Bay Co., the Toronto-based parent company of defunct high-end retailer Lord & Taylor.

Lord & Taylor was the nation’s oldest department store chain when it filed for Chapter 11 bankruptcy protection in 2020, citing the COVID-19 pandemic as a major reason.  The retailer closed all 38 of its stores, including the four on Long Island, the same year.

 Of the 29 former Lord & Taylor properties that Hudson’s Bay owns nationwide, about 20% are in the process of being converted to medical offices, including three on Long Island, said Doug Adams, senior vice president of development at Hudson’s Bay.

The buildings average 120,000 square feet on two levels and have ceiling heights of 16 feet to 22 feet, he said.

Hudson’s Bay has a strong real estate portfolio located in prime areas but it is not rushing to lease the spaces since the tenants have to be the right fit, he said.

Tenants being considered are in the medical, life sciences, office services, entertainment and other uses adjacent to retail, he said.

“Right now, the medical field is the number one generator of demand.  So, it’s really the industry that’s growing … There’s more [medical] tenants, more groups in the market looking for space,” he said.

In August 2021, Hudson’s Bay announced that it was partnering with co-working company WeWork to turn some former Lord & Taylor spaces, including the one at 1440 Northern Blvd. in Manhasset, into SaksWorks, a membership-based co-working space with offices and other components. 

But now NYU Langone Health, which has 700,000 square feet of new ambulatory care clinical projects under development in former retail, or mixed-use spaces, on Long Island, has signed a 30-year lease for the entire 161,726-square-foot, three-level building in Manhasset.

The facility will offer ambulatory surgery, endoscopy, a large physician office practice with about 75 physicians and 65 exam rooms, and a full-service imaging center with MRIs, general and breast ultrasounds, mammography, X-ray, and other services, said Andrew Rubin, senior vice president of clinical affairs and ambulatory care at NYU Langone Health. He said it was too soon to provide the expected opening date.

At the former Lord & Taylor in Garden City, at 1200 Franklin Ave., two tenants have leased the space: Northwell Health will be taking the first floor for an 80,000-square-foot ambulatory medical center, while Morgan Stanley is taking the second floor.

Hudson’s Bay also plans to convert its former Lord & Taylor at the Walt Whitman Shops in Huntington to medical offices.

The company submitted a site plan application to the town in September to convert the 119,836-square-foot,  two-level former department store to medical offices but no approvals have been granted yet, a town spokeswoman said.

Steel Equities, which did not respond to Newsday’s requests for comment, owns the former Sears and a vacant Sears Auto Center building at Smith Haven Mall in Lake Grove, a former Sears in Garden City and one in Hicksville.

This spring, the former Sears in Lake Grove will become home to Stony Brook Medicine Advanced Specialty Care at Lake Grove, which “will offer convenient, quality medical care in a modern, open-concept layout occupying more than 170,000 square feet,” said Dr. Todd R. Griffin, Stony Brook Medicine’s vice dean for clinical affairs and vice president of clinical services.  

An artist’s rendering of the Stony Brook Medicine Advanced Specialty Care facility that will open in the former Sears at Smith Haven Mall, and what the construction site looked like on Wednesday. Credits: Stony Brook Medicine; Newsday/John Paraskevas

The building will be a relocation and consolidation of  about 25 separate offices and 40 to 50 specialty practices from Stony Brook Technology Park in East Setauket, about a mile from Smith Haven Mall, he said.  The moves will be phased in over five years, starting in May.  By 2027, about 1,000 Stony Brook Medicine employees will be working at the mall site, Griffin said.

The benefits of the large building include its plentiful parking and high visibility.  It’s also easier to access by bus — a large percentage of Stony Brook’s patients reside in underserved communities and may not have cars  — so the move aligns with the nonprofit’s mission, he said.

“We’re a state safety net hospital.  Not all the others are … We see everybody whether  you have insurance or don’t have insurance,” Griffin said.

The Lake Grove location also will allow for better coordination of care for patients with multiple medical problems because they can have “one-stop shopping” for their health care needs, he said.

Not only will Stony Brook save money by providing economies of scale by locating staff and supplies under one roof, but there will also be significant saving in lease consolidation, he said.

The first phase of Stony Brook Medicine's construction is nearing completion. An...

The first phase of Stony Brook Medicine’s construction is nearing completion. An area of the new comprehensive pain management center and the main reception area are shown Wednesday, along with a gutted portion of the former Sears store. Credit: Newsday/ John Paraskevas

As for the former Sears in Garden City, NYU Langone Health will open an ambulatory care center in the leased space this fall, Rubin said.  The four-level, 260,000-square-foot, free-standing building is at 1111 Franklin Ave.

Meanwhile, Northwell Health, the largest health care provider in New York state, has a 5,000-square-foot pediatric center under construction in a former Mattress Firm store at 187 Sunrise Highway in West Islip, Northwell spokesman Jason Molinet said.  The facility is expected to open in the fourth quarter of this year, he said.

In October, Northwell opened a $1.8 million, 9,428-square-foot multidisciplinary practice in a former strip mall at 4070 and 4072 Hempstead Turnpike in Bethpage.  The health care provider also opened a Sports Therapy and Rehabilitation Services site in 4,000 square feet of shopping center space at 9A Hewitt Square in East Northport in December.

“Northwell is dedicated to bringing innovative health care closer to home for our patients. Retail sites routinely provide the necessary requirements for medical space: proximity to our patients, parking and signage,” Molinet said.

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