Selecting a Site for Medtail Niches: Behavioral Health and Animal Health

Medtail businesses, which have both retail and medical care components, are some of the hottest plays in commercial real estate today. But how does a growing enterprise select the right location? Do you pluck sites with strong retail characteristics or crunch data like a healthcare operator?

What about when you’re seeking locations for the rapidly growing but highly specific niches of behavioral health and animal health?

LoopNet spoke with some of the leaders of Equity, a full-service commercial real estate firm based in Hilliard, Ohio that specializes in tenant representation for medtail clients nationally, to find out what goes into the market analysis and site selection process for medical retail and some of its most sought-out subsectors.

Equity’s engagement with its medtail clients, who range from REIT-backed urgent care chains to mom-and-pop pet care boutiques, revolves around data — much like any other location analysis. Equity builds a quantitative model using variables such as demographics, geospatial attributes, traffic studies, real estate metrics and even Google Analytics data.

But unlike standard market analysis, Equity uses independent variables rather than “buckets of variables” which would broadly be called psychographics, President Patrick Wathen explained.

Psychographics, a methodology which describes traits and behaviors among demographic data, is useful in retail marketing, but it’s not enough for medtail, Wathen said. “It breaks the population down into these neat little segments with a picture and a story that says, for example, [you want to target] this middle-class, milk-and-cookies household with 1.2 children, two cars, in a house valued between $250,000 and $350,000, etc. When you do that, though, you lose the ability to really fine-tune the independent variables.”

Any retailer will rattle off the exact age group, gender group, household size and other variables that characterize their target consumers, Wathen said. Medtail needs this type of traditional demographic market analysis, “but one thing that has shifted dramatically over the last decade in the healthcare space is that 'patient' and 'consumer' are synonyms.”

And when it comes to attracting patients, especially to highly specific services such as behavioral healthcare, “it always hinges around identifying where there’s the greatest underserved market or unmet need,” he continued. That means taking a more deliberate look at the competitive landscape, which may offer more insight than big data.

“That’s the magic of it. You get in the strike zone with the quantitative, but you can never overlook the fun and unique elements of real estate. Every single piece is different and requires a trained eye to identify and vet correctly.”

Equity President Patrick Wathen

Finding out where patients come from is also highly specific to each client and market area, he added. “We differentiate catchment area variables based on geography, so you might have three different models for urban, suburban and rural markets. We might find you have a catchment of 30- to 60-minutes in northwestern Arkansas, but one of 7 to 10 minutes in downtown Tulsa, Oklahoma.”

You’ll want to test a number of markets against the variables you identify as well, Wathen noted. “If you’re going to deploy capital to 20 clinics this year, how do you prioritize locations with a relative ranking of where the highest ROIC, or [return on invested capital] will be?” he continued. “It’s about testing as many potential submarkets against each other as possible.”

But having some initial criteria in mind also helps focus the project. “If you start with demographics, you might find the optimal point in a city is in the middle of a golf course where you can’t do a real estate deal,” said Managing Director Matt Lasky.

So instead, Lasky said, “We start with some client direction on the front-end.” The tenant may want to home in on a particular trade area or to stay within a certain driving radius so that all sites can be covered by a regional manager, for example. They might want to be in an anchored retail location, or within a node of medical office buildings.

“Just because you and somebody else both have an autism therapy businesses does not mean that you have an off-the-shelf autism therapy model.”

Equity President Patrick Wathen

“The most fun part for us is probably the stakeholder involvement,” Wathen said. “We like to have the people that are engaged at the operational level on that kickoff call to offer their opinion because they're the ones that are in that clinic operating it every day. When you get someone that's had 20 years of experience and they operate 50 centers, they'll have some gut-level stuff that we can try to translate into an objective, quantifiable variable.”

There are usually data points “that stick out universally across certain types of businesses,” Wathen said. “The variables will be mostly the same, but the weightings of those variables will vary somewhat.” Therefore, the model is customized “not just to each type of use, but to each business specifically,” he added. “Just because you and somebody else both have an autism therapy businesses does not mean that you have an off-the-shelf autism therapy model.”

After establishing the variables that are most impactful to the performance of a location for a particular client, the team applies them over a target market.

The system is designed to reverse-engineer the characteristics of the most successful units. “We build each client its own custom model using a multiple regression analysis and compare all those individual variables against the actual performance of the clinics at a site level, allowing us to drill in on what their secret sauce is, effectively," Wathen explained.

“We determine what percentage of their performance is attributed to each one of the variables, and then overlay that on each prospective market” to see where those features are best attained.

From there, the team can drill down into the qualitative aspects of real estate, such as site features and the specific characteristics of nearby competition, to find a site that works with the client’s budget and timeline.

“That’s really the magic of it,” Wathen continued. “You get in the strike zone with the quantitative [assessment], but you can never overlook the fun and unique elements of real estate. Every single piece is different and requires a trained eye to identify and vet correctly.”

Having “boots on the ground” in prospective markets and submarkets is a part of the process that Equity prides itself on. “There may be a vacant restaurant building that nobody has listed right now because the last group failed and nobody has it listed again yet. Or it may be a rural location that is not covered by the large brokers. There’s always those pieces that are picked up just by investing the time and driving the markets.”

Behavioral health real estate, such as centers for addiction treatment or autism therapy, is a perfect example of how data can only go so far in the site selection process.

“Identifying and parsing out the competitive landscape, for example, is one of the most labor-intensive but important pieces of how our clients make site-selection decisions,” Wathen said. It’s important to recognize whether a competitor is “passion-based or community-based,” for instance, “which is fairly significant in the autism therapy space.”

In addiction treatment it’s also common for an enterprise to have been kicked off by an individual or a group who “may have had a need in their family or who recognized a need in their community for a particular service that didn’t exist before,” he continued.

That singular, “fairly small-scale mom and pop operator might be the only competitor in a certain market — even for a service where the prevalence of need is growing as rapidly as autism.”

Landlords of these facilities might not always be equipped to fine-tune the architecture of the space. “We've spent a long time the last couple of years educating landlords on things like sound transmission coefficient (STC) requirements,” Wathen continued. One aspect of autism therapy, for example, is that some patients may be loud while receiving therapy and the space may need a certain level of sound dampening insulation between contingent tenants, which is similar to what you need in a place where you have dogs. “You do have to understand and address those concerns as a landlord.”

And when zooming out to take a “forest-from-the-trees” approach to market and site analysis for behavioral health, additional nuance goes into finding the perfect location — from specific physical characteristics of the lot, to navigating the complex web of the U.S. insurance market.

Consumer Behaviors Influence Behavioral Health Site Selection. In the site selection process, “the qualitative [aspect of our work] is where it really starts to get interesting,” Wathen said. “It varies from some of our urgent care clients wanting to be right next to Starbucks on a hard corner in high-dollar retail spaces — to behavioral health operators that are fine being on the low-acuity side where visibility, for example, is not as huge of a priority as ease of access is.”

For addiction therapy, a good parking lot could make or break your success. “You might be around the back of a shopping center where a national player doesn’t want to go, where there’s maybe a junior box that has gone dark and the landlord is looking to reevaluate.”

To excel at this location, you don’t necessarily need foot traffic or marketing signage, Wathen continued, but you do need to reduce the number of barriers to getting into and out of the space. “Any roadblock, anything that the patient/consumer could stumble over, becomes an excuse to them not showing up to get to the meeting and get the therapy.” It often takes boots-on-the-ground due diligence in this case to “make sure that it doesn’t take four left turns to get in the parking lot,” he said.

“A lot of the site selection aspects are synonymous with what a retailer wants,” he continued. “There's a huge preference for a behavioral health site to be freestanding if it can be, for example. But these operators also can't necessarily afford high-dollar rents.”

To meet qualitative requirements for a particular site while staying in budget, you may need to think outside of the box and even be a bit opportunistic. The right spot for behavioral health may turn out to be a second-generation office space, for example.

Who’s Picking Up the Bill? Pick Location Based on Payer Mix. And the real estate budget for any given medtail operation, especially those focusing on behavioral health, is largely predicated on the highly regionalized and state-specific insurance market.

“In addiction therapy clients, for example, payer mix is another big quantitative variable whereby they have a unique business model state by state, and that translates to the real estate,” Lasky said.

Payer mix is the percentage of patients with government health plans versus private insurance, he explained. “In one state [operators] want commercial insurance and private payment … and will be looking for grocery-anchored shopping centers, for example, and in the next state over they might be entirely Medicaid-focused, where the reimbursements are smaller and you’re looking for the sort of retail-characteristics-in-an-office setting.”

In the retail world, the strategy for a branch in Charlotte, North Carolina, metropolitan statistical area for example, might extend into nearby South Carolina markets such as Rock Hill. But in healthcare or even medtail, crossing the state line changes everything, Lasky explained. “For healthcare providers, going across state lines means re-credentialing,” Wathen said. “It's a significant effort to go into a new territory, and so that's a large part of the market planning and analysis.”

Behavioral Health Is Essential, Especially When the Economy Is Unwell. Demand drives behavioral health real estate just like it does any other segment of the economy, but Equity has found that the space is almost countercyclical. “In our experience doing some of the same work in [the Great Recession], we saw that a lot of people slowed down,” Wathen said. That was true of many behavioral health operators, as their ability to provide those services was challenged.

But the sector is essential, Wathen continued. “This time around [in the early days of the 2020 coronavirus outbreak] they got back to normal operations as quickly as they could because that was critically necessary to their patients’ mental health and even survival, in some cases.”

Equity’s biggest client in the behavioral health space only slowed its growth for a few weeks at the start of the pandemic. “Our addiction therapy clients saw their need go through the roof. They just continued to grow as rapidly as they could, partially because there's such a massive unmet need. And similarly, in the autism therapy space … it's growing as rapidly as it can.”

A professional in the “deathcare” industry told the firm that the biggest uptick in its funeral operations during the throes of the pandemic last year was not directly related to COVID-19, (though that was the main line in the media narrative) — but to overdoses.

“The opioid crisis shows no signs of abatement,” Wathen continued, “and the pandemic really exacerbated a lot of those issues because there's more isolation and an inability to do group therapy,” all while more individuals and families faced devastating financial woes.

On a much lighter note, pet ownership is another facet of American life that’s driving a distinct type of real estate demand, and it’s sailing on several industry tailwinds, according to Lasky.

With furry friends in 70% percent of U.S. households, animal care is a niche that cannot be overlooked by investors, landlords, retailers or even mixed-use property developers.

Diving into the subcategory a few years ago was “really, really eye opening,” Wathen said. “We decided to put deliberate effort behind focusing on it because the demand is just going to continue to increase enormously.”

Beyond the strong quantitative data that Equity sees, it’s such a big trend that it’s easy to observe empirically. “These days it seems like every millennial has a pet, and we all know at least someone who adopted a pet during the pandemic,” Wathen said. “But it’s not just that — a large consumer of veterinary services is baby boomers and ‘empty nesters’ who adopt a pet because they’re at a point in their lives in which they have more disposable income and more time than ever before.”

People Pay Out of Pocket for Pets. Much like human healthcare, Wathen continued, spending on pet care is countercyclical and nearly recession-proof. “If someone loses their job and money is tight they may deny themselves something — but buying a toy for their dog is a small pleasure that doesn't break the bank. Animal healthcare spends also fared well throughout this recession; owners got around to routine dog checkups and paid more attention to episodic issues.”

So, whether it’s a “direct veterinary business model,” Wathen said, or a site that “leads with health but blends together additional services like grooming, daycare, training or some kind of retail component … these are great uses that really add an aspect that retail landlords weren’t thinking about in years past.”

Mixed-use developments stand out as a no-brainer for pet care real estate. “If you're developing a Class A multifamily project with retail on the first floor … and if you have a vet with some component of day care or boarding in your merchandise mix, you’re creating these pet-friendly communities and it’s a huge amenity to your tenants,” Wathen said. “And from a landlord standpoint, it has a low default rate or failure rate.”

Because at the “opposite end of the extreme from behavioral health,” when it comes to payments, animal health is mostly a cash-pay business. “Private equity firms love it,” Lasky said, “because the equipment's cheaper and you get cash, so you have no revenue cycle management.”

"It’s a purely supply and demand situation right now. The opportunity there is a little bit like urgent care around a decade or two ago, in which there’s not a lot of big, branded vet platforms.”

Equity Managing Director Matt Lasky

Opportunities to invest in the space vary widely, from entrepreneurs with a single, standalone retail boutique to institutional investors sweeping up large swathes of assets.

It’s similar to the consolidation seen across the human healthcare industry, Wathen said. “The veterinarians who you took the family pet to when you were growing up have been at their location for 20 years and probably will be for 20 more.” Many of these vets are doing business out of converted houses or former light industrial locations. “And now there's a lot of corporate interest in acquiring these practices and rolling them up into larger entities.”

"It’s a purely supply and demand situation right now,” Lasky continued. “The opportunity there is a little bit like urgent care around a decade or two ago, in which there’s not a lot of big, branded vet platforms.”

Institutional players, he continued, are “starting to reach more into the community” to make this essential business more “accessible and professionalized — much like in the early days of urgent care.”

Competition in the veterinary real estate space, when it comes to national scaling and recognition, is slim. “You don't have significant national competition,” Wathen said. "It’s pretty much just Banfield [a vet clinic chain that operates around 1,000 clinics, mostly inside PetSmart stores] in terms of a true national player. And so that just creates opportunity for smaller regional players and for growing organizations to stake their flags and grow in that space.”