Developers Find a Cure in Health Care
Despite a real estate slump that has idled 600,000 construction workers nationwide and plunged scores of developers into bankruptcy, health-care building remains robust--with facilities from California to Virginia undergoing expansion.
Health care is expected to account for $9.5 billion in new construction this year. Although the field is drawing the attention of beleaguered real estate developers, architects, contractors and others hurt by the downturn in traditional office construction, the health-care building frenzy could slow as new federal rules limiting health-care construction spending are phased in over the next decade.
In the first six months of this year, new construction of private hospitals and other health-care institutions totaled $4.6 billion. That was a 5% rise over the same period in 1990 and double the amount in the first half of 1986, according to the U.S. Department of Commerce. Public hospital construction fell 10% to $1.2 billion through June. But a March survey by Modern Healthcare magazine found that two-thirds of 192 architects, builders and construction management firms expected the overall health-care field to continue to grow for the remainder of the year.
“Nearly every other sector of construction is down, but health care is healthy and steady,” said Walter Guest, vice president of McCarthy, a St. Louis-based construction company. Guest said McCarthy’s more than 40 health-care projects--which include a $110-million facility at the Pomona Valley Hospital Center and a $30-million medical office building at Kaiser Medical Center in Stockton--account for 60% of the firm’s estimated $914 million in yearly construction revenue.
The growth in health-care construction has been fueled by a striking demand for medical services, new medical technology and federal policies that encourage hospitals to build facilities designed to treat the ill on a relatively inexpensive, out-patient basis rather than keeping them overnight in costly acute-care hospital beds.
Health-care construction has also been insulated from the real estate downturn because it has escaped the credit crunch that has hobbled the $25.2-billion commercial office building market. Most public hospitals are financed by revenue bonds issued by local health-care agencies. Private hospitals and medical office buildings are often financed from a company’s cash flow or long-term corporate borrowing.
Health care’s resilience is one of the few brights spots in an otherwise bleak construction industry and has been especially important in California, where about 9% of the nation’s 6,185 hospitals are located. Construction employment has dropped by about 40,000 workers in California in the last year, according to the Associated General Contractors of America. Nationally, construction jobs fell from a high of 5.4 million jobs in February, 1990, to about 4.8 million in April, 1991.
As opportunities to build traditional office buildings dry up, some developers in commercial real estate have sought sanctuary in the health-care sector.
“The private commercial field is in the doldrums; we are looking at other areas of investment . . . (including) health-care projects in Los Angeles County,” said Andrew Natker, an executive with the Alexander Haagen Co., a developer based in Manhattan Beach.
So, too, are others.
UCLA’s $185-million medical center--a 600,000-square-foot complex under construction--attracted bids from 20 developers. They included Boston-based Cabot, Cabot & Forbes as well as the winning firm, Held-Jones of Los Angeles, said Bill Cormier, director of operations for UCLA capital programs. In addition to managing construction, developer Held-Jones will own and lease a 145,000-square-foot medical office building that is part of the complex, Cormier said.
Corporate health-care providers are similarly besieged by developers.
“We’re going to build between 10 and 15 new medical buildings, and there seems to be more firms out there interested in developing those buildings--either with our nickel or theirs; it’s a new trend,” said Sydney F. Tyler Jr., executive vice president of strategic planning for Santa Monica-based National Medical Enterprises Inc.
But developers seeking to build medical facilities face two big stumbling blocks: navigating complex health-care regulation and dealing with finicky medical tenants.
Medical facilities often require specialized regulatory approval in addition to the normal zoning and building permits. And since doctors offices are comparatively small, many more of them are required to fill a building. While doctors tend to lease longer than many corporate tenants because they make such a big investment in stationary medical office equipment, doctors can be a cantankerous lot, experts say.
“Doctors are very demanding, and a lot of developers just don’t want to go through the brain damage of dealing with them,” said Jack Rodman, managing director at Kenneth Leventhal & Co. Doctors often want their office space or utilities rearranged but rarely have the time or patience to work out the logistics with their landlord, he said.
Because so many contractors and developers are desperate for work, many are suddenly developing the time and patience to work with health-care providers--sometimes at bargain prices.
“We pay about $60 to $80 per square foot for low-intensity outpatient space,” said Joseph Swedish, chief operating officer at Mary Washington Hospital in Fredericksburg, Va. He said the $85-million cost for a new 310-bed replacement hospital is “quite a bit lower” than the hospital expected when it began planning for the facility five years ago.
But the good times may soon end for the health-care industry.
Hospital admissions dropped a surprising 3.1% in the first quarter of this year, and the federal government last week adopted new Medicare rules that--beginning Oct. 1--could cut the amount the government reimburses hospitals for their capital costs.
Under the regulations being phased in over the next decade, hospitals will be reimbursed a fixed amount for capital projects, based on the number of Medicare patients they treat. Hospitals whose capital costs exceed the allowances under the new formula could receive much smaller Medicare capital payments than under the current scheme, which returns a flat 85% of a hospital’s actual capital costs.
Big Projects Current construction projects at some major Southern California medical facilities:
Estimated Project Location development cost Huntington Memorial Pasadena $66 million Hospital Veterans Administration Los Angeles $48 million Outpatient Clinic Pomona Valley Hospital Pomona $110 million Medical Center Mission Hospital Regional Mission Viejo $34 million Medical Center UCLA Medical Center Westwood $185 million
Sources: McCarthy, Bobrow/Thomas & Associates
Hospital Building Boom
Defying the current building slump, health-care construction remains robust.
Value of new hospital and institutional construction, public and private.
SOURCE: Bureau of the Census
