Massive project, massive planning

HOUSTON’S MEMORIAL HERMANN SYSTEM WRAPPING UP CENTURY BUILDING PROJECT

 

By Jessica Griffith

 

What covers nine campuses, contains more than 3 million square feet and spans 100 years of healthcare history?

They say everything is bigger in Texas, and Memorial Hermann Healthcare System’s Century Project is doing plenty to propagate that theory.

To celebrate its 100^th anniversary, Memorial Hermann decided to meld more than a dozen new facilities into a single, three-year development program designed to expand the healthcare company’s services throughout Houston and its ever-encroaching suburbs.

The company declines to provide a total price tag for the project, but the 11 buildings that will open this year and early 2007 are expected to cost an estimated $600 million. Not included in that figure were buildings that opened in 2005: a heart hospital in Memorial City and medical office buildings at The Woodlands and Southeast campuses.

“We developed a fast-paced schedule with the goal of delivering these buildings in three years, and that time is up in December,” says Marshall Heins, vice president of construction, real estate and support services for Memorial Hermann. “Houston is growing so quickly and we wanted to be the first to market in many of these newer communities.”

The communities in question are not exactly new, but cities such as The Woodlands and Katy have shed their small-town images and blended into the greater Houston metropolitan area.

“It is important to residents to have healthcare near their homes, and historically, the small community hospitals could not provide a full array of services,” Mr. Heins says. “Now we have a network to offer a higher level of care in the community.”

The first 100 years

The Century Project developed from a series of strategy sessions in which Memorial Hermann executives determined where they needed new hospitals and medical office buildings (MOBs).

Although the final plans came together in early 2004, the team chose the 2007 deadline so that it would coincide with the company’s 100^th anniversary. In 1907, Baptist Sanitorium (later Memorial Hospital) opened in downtown Houston; Hermann Hospital opened in 1925.

Hermann Healthcare System and Memorial Healthcare System merged in 1997, combining Hermann’s teaching hospital and children’s hospital at the University of Texas with Memorial’s eight community hospitals. Memorial Hermann now operates nine acute-care hospitals as well as specialty care facilities, a retirement center and a home health agency. The system employs 16,500 people and has almost 3,200 beds.

“Hermann brought the research center to the merger and Memorial brought the beginning of this network that we are taking into the communities,” Mr. Heins says.

Blueprint for expansion

 

The Century Project consists of more than two dozen facilities, some of which are located in multipurpose medical plazas. They fall into four major categories: MOBs, ambulatory surgery centers, diagnostic imaging centers and heart and vascular institutes. Memorial Hermann also is building replacement hospitals in Katy and Sugar Land.

In total, the overall project consists of 2.2 million square feet of medical office and 1 million square feet of patient-care space.

The large number of projects convinced Memorial Hermann executives to introduce a competitive bid process with multiple vendors that would give the company the best chance to complete construction on time, Mr. Heins says.

“We decided to manage it like a mutual fund manager and spread our risk around,” he says. “No one firm could handle a third of this volume.”

About a dozen contractors worked on the Memorial Hermann buildings, as did five architectural firms and five project management companies. The firm took a similar approach to vendors when it purchased medical equipment, furniture and fixtures.

“If you go to a vendor and say I am going to buy 12 MRI machines in three years, or I am going to furnish 2 million square feet of office space, you tend to get a lot of interest,” Mr. Heins says. The same economies of scale applied to everything from window glass to concrete.

This strategy required Memorial Hermann to plan ahead and bid everything at the beginning of the Century Project, which proved beneficial when last summer’s storms caused construction prices to skyrocket.

“We couldn’t have predicted this, but if we had gone forward and bid these sequentially, the increased costs of materials, gas and electricity since Hurricane Katrina would have raised our costs even higher,” Mr. Heins says.

For example, the largest development in the Century Project is Memorial Hermann Medical Plaza in the Texas Medical Center, a Houston healthcare campus with 42 medical institutions, including 13 hospitals. The 30-story, 511,000 square foot MOB will contain a six-suite surgery center and imaging center, plus two stories of retail and restaurant space.  The price tag is $160 million, but Mr. Heins says it would cost an additional $22 million if bid at today’s constructions costs.

Memorial Hermann also saved money by commissioning prototypes for the buildings, meaning the architects did not have to design fresh plans for each MOB, imaging center or hospital.

Finding the money

While one architectural design might work for multiple MOBs, it was not practical when it came to funding the Century Project. Memorial Hermann combined four strategies to raise the millions necessary for the project.

Most of the funding came from operating income, but the company also used tax-exempt bonds, philanthropic donations and, as Mr. Heins phrases it, “other people’s money.

“We found developers to obtain debt for the non-core healthcare facilities, such as office buildings,” he says. “That allows us to conserve our debt capacity for core facilities.”

Several of the buildings were constructed in partnerships with other developers, including Memorial Hermann Medical Plaza. Walt Mischer, president of Mischer Healthcare Services in Houston, calls the plaza a “once-in-a-career” opportunity because of the project’s size and prominent location adjacent to Memorial Hermann-Texas Medical Center and Rice University.

“It is everything a medical developer would be looking for in a medical site; it must be one of the best medical sites in the world,” Mr. Mischer says. “It is a unique opportunity.”

Mischer Healthcare has collaborated with Memorial Healthcare (later Memorial Hermann) on five projects dating to the mid-1980s, but Mr. Mischer says he declined to participate in any other developments in the Century Project plan.

“This is a big project in itself and I like to personally run projects,” he says. “I didn’t want to be distracted by projects in the suburban markets.”

Several other developers signed up to build MOBs on the Century Project roster, including Trammell Crow Co. of Dallas; MetroNational Corp. and Transwestern Development Co. of Houston, and DASCO Cos. of Palm Beach Gardens, Fla.

“Memorial Hermann is the largest hospital system in Houston and we’ve been looking to establish a relationship with them,” says Matt Khourie, president of development and investment for Trammell Crow’s central region.

Trammell Crow is the project manager for the Memorial Hermann Heart and Vascular Institute on the Southwest campus. The specialty heart hospital and an adjacent MOB are under construction and scheduled for completion in December. Trammell Crow also is the developer and part owner of two MOBs, one in Katy and the other in Sugar Land. Those buildings are complete, although the adjacent hospitals remain under construction.

All of the office buildings provide opportunities for physicians who rent space to purchase an ownership stake, although medical condominiums are not available.

Memorial Hermann took advantage of technology to promote the project and attract tenants and partners. A detailed Web site directs physicians to leasing information and provides updates for employees and community residents.

The company and its partners will continue to own all of the buildings but the surgery centers will be managed by United Surgical Partners International (Nasdaq NM: USPI), a surgery center operator based in Addison, Texas.

Lessons learned

All things considered, the Century Project hummed along smoothly and Memorial Hermann expects to meet its ambitious goal.

“We did the right thing by creating excitement around the project,” Mr. Heins says. “We gave it a name and gave the team a large objective and put everyone on the same schedule.”

Memorial Hermann’s organizational skills helped keep the various teams on track, Mr. Khourie says.

“They assembled a team of all the consultants and players early on in the process, so everyone knew what their role was and it was clear before we broke ground who would do what,” he says. “We established interim milestones and everything was very well-defined.”

Still, manpower created some challenges, Mr. Heins says. Project managers, architecture firms and other professional consultants would lose employees, and new staff had to navigate a steep learning curve in a brief timespan.

A few hurdles were unpredictable. The storm season in 2005 proved more brutal than normal and crews lost several weeks of work, although none of the Century Project buildings were damaged in the storms.

If he had the project to do again, Mr. Heins says he would have scheduled a little more time for such unknown variables. He also says he would have insisted on plans for the standardized buildings before the project went to bid.

“We sometimes were forced to review competitive bids with the design documents not 100 percent complete,” he says, which created some misinterpretations.

The tight schedule created significant deadline pressure, Mr. Khourie adds. But it also helped the teams stay efficient.

“We could really put more resources into the project and focus on it better,” he says.

The timeframe also ensured the Century Project would have the maximum impact on a rapidly growing region of Houston.

“For Memorial Hermann, this is going to even more firmly establish them as the leading healthcare provider in the Houston market,” Mr. Khourie says. q

Jessica Griffith is a business writer specializing in commercial real estate.

Memorial Hermann Century Project

HOUSTON

 

PROJECT HIGHLIGHTS

■  14 new buildings and more than 3 million square feet of construction on nine campuses

■  Three Memorial Hermann Heart and Vascular Institutes on the Southwest, Memorial City and Texas Medical Center campuses

■  Nine MOBS, located in Memorial City, Southwest, Katy, Sugar Land, The Woodlands, Southeast, Pearland and Cy-Fair, plus the Memorial Hermann Medical Plaza at the Texas Medical Center in Houston

■  Replacement hospitals in Katy (125 beds) and Sugar Land (77 beds).

■  Seven ambulatory surgery facilities in MOBs in the Texas Medical Center in Houston, The Woodlands, Katy, Sugar Land, Pearland, Cy-Fair and Southwest

■ Seven outpatient diagnostic imaging facilities located in the hospitals at the Texas Medical Center, The Woodlands, Katy, Sugar Land, Pearland, Cy-Fair and Southwest.