Hanging with Hafen: Making the most of a lease space practice

Recently, I was struck by how many hospitals we have designed for lease spaces. It seemed like before the recession in 2008 that the hospitals we designed were divided evenly between leasehold, new freestanding facilities, and renovations. Since the downturn, the majority of hospitals we design are definitely leasehold facilities. Leaseholds don't require as much capital to get into as freestanding buildings. This is no big surprise. Veterinarians, much like the rest of the general retail segment, are just now emerging from the recession. Many veterinarians successfully adjusted to the recession by fine-tuning their practices, making them leaner and meaner. Even as the number of client visits flattened out, they were able to boost their income per client visit. Only recently have veterinary practices seen the number of visits going back up. Amazingly, many practices having weathered the storm are in a stronger financial position than they were before the downturn.

But it isn't that veterinarians don't have the money, it's that they can't easily get the financing. Supposedly there is money out there. In fact, the Federal Reserve has driven down the cost of money (i.e. the interest a borrower pays), but many banks still are not comfortable loaning out the money they have. They would rather sit on it and strengthen their bottom line rather than risk losing it by lending it out. It's easier to find money to borrow for leasehold improvements than finding money for a freestanding facility. Conventional banks have tightened up their lending policies for freestanding facilities, increasing the paperwork, and often the required equity to loan balance. This inability to get financing isn't shared by the corporate veterinary organizations. Unlike the small mom and pop private veterinary practice, they have other sources for financing their facilities. Often they can self-finance, which gives them more latitude.

The same inability to finance a freestanding facility has caused developers to shy away from building shopping centers. Consequently, there's more demand for first-rate lease space than there is available. Most of the available retail lease space is second rate or just plain weird. It used to be that the normal retail lease was in a new shopping center, the space itself often a nice neat box, most often 60 or 70 feet deep. Nowadays, it can be anything. We recently designed a hospital in a lease space that was less than 25-feet wide and more than 100 feet long Another facility was only about 2,800 square feet and had more than a dozen freestanding columns in the space. Still another had three different floor levels. With such peculiar encumbrances, it's important that you have an architect that knows how to do the very best possible veterinary facility within the given parameters.

Lease rates also are not as low as you would hope or expect. Developers are less likely to make you a deal right now because many are seeing the demand creeping up. If there is a national average rent for a medium to small lease space in a generic strip shopping center it would probably be in the low $20s a square foot per year. This is in contrast to leases from a few years back that were in the $12 range. In more desirable locations, bigger metropolitan areas, like Long Island, New York for example, the cost can be as much as $40 or $50 per square foot.

With rents this high there is more pressure to do more in a smaller space. In the past, we designed for one exam room per 1,100 hundred square feet or even more in a typical freestanding hospital. Today we are seeing 2,800 square-foot facilities with five exam rooms. After all, the exam room is where you make your money. Now, relatively small private practices are centered on wellness and in turn are more outpatient based. There are two reasons for this-specialty/referral practices have scooped up the more complex cases, and often recent veterinary school graduates are more comfortable taking on less ambitious cases. This might be good as the typical client probably has less money to spend for more aggressive medical treatments or procedures. With a movement toward less invasive medical procedures like endoscopic and laproscopic work there is less need to hold pets for long stays. With less ward space, veterinary facilities can be smaller and less complex to build, and in turn, a lease space is once again a very feasible alternative to a freestanding facility. Here are a few examples of hospitals we have designed recently in relatively small spaces:

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In this hospital in New York City we managed to get three exam rooms in 1,780 square feet, which works out to one exam room to 600 square feet. The other challenge in this plan was the two existing oversized columns that we had to incorporate into the proposed design. The success of this plan is also derived from the fact that we utilized New York City sized rooms, which are probably about 10 percent to 20 percent smaller than what we would use in a normal leasehold space in a typical suburban location. In New York people are used to more compact spaces.

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This plan in Colorado shows what happens when your lease space is wide and not deep. The individual rooms are a little bit bigger than the previous hospital, but the plan is compact. Much like the previous plan, the amount of animal holding and ward space has been driven down. Likewise the laundry and utility space is very minimal.

Click to view larger flooplan

At only 20 feet wide, this is an example of what happens to a hospital design when the width is minimal and the length is extreme. We tried to break down the linearity of the plan by placing the treatment area in the center and creating an open hub like space to group the hospital around.

The whole trend toward leasehold veterinary facilities seems to be self-reinforcing. Not only are leasehold facilities more financially accessible, outpatient care is increasing, and clients are potentially more attracted to the convenience of a leasehold facility. In human healthcare, there is a definite trend in general practice toward smaller-scale, outpatient facilities, and more “express” hospitals. Freestanding day surgery facilities are springing up all over. In human healthcare there is a trend away from in-patient procedures in large, multi-bed central hospitals. Small-scale outpatient facilities make for cheaper medicine. This is the same thing the veterinary market is doing as they go from holding animals overnight to sending them home at the end of the day.

But the wave of the future is the “express hospital,” a small-scale, minimal medical facility often staffed by a nurse practitioner and not a doctor. Built into the back of your local supermarket, Walmart or drug store, they provide immediate, and low cost medical care. The convenience of one-stop shopping is also driving this trend. This is the same reason you are seeing Starbucks inside your grocery store. It's fast and easy. In the veterinary world this is essentially the Banfield Pet Hospital model, and it seems to be working. But I don't think you literally need to be inside the mother store. Locating right next door, in the same shopping center, can be as good, if not better. A veterinary medical facility doesn't have to be tied to a pet store to succeed. It is pretty darn easy to pick up your groceries from the supermarket, and then dash next door (with the dog) to see the local veterinarian. Your clients are probably more often in the supermarket than they are at PetSmart.

In the past leasehold veterinary facilities have often been looked down upon as the poor cousin-something you were forced to do, but didn't really want to. But in this market, and these financial times they make a lot of sense. Yes, you might not end up staying there forever, but a leasehold facility can be a good business incubator. After you have been in your leasehold facility for a number of years, and when you have a bundle of money saved, you can still build your dream hospital. Or if building a dream hospital is not your priority, you can have a nice, cost effective, smaller facility that isn't so hard to manage, leaving you more time for a life outside of your work.