Market Focus: New York (January 2007)

Make it or break it New York City

HEALTH SYSTEMS SEEM TO EITHER STRIKE IT BIG OR STRIKE OUT IN THE BIG APPLE

 

By John Mugford

 

We hate to call upon that oft-used line from Frank Sinatra’s well-known song, “New York, New York.” But in this case we just can’t help it.

So go ahead and sing along if you like… “If I can make it there, I’d make it anywhere…”

The song comes to mind because the Big Apple’s healthcare scene seems to be one where some of the bigger, healthier systems are doing quite well, thank you, but the smaller, struggling systems are not.

This metropolis of the haves and have-nots is exacerbated by the fact that New York is a place where the cost of doing business, as well as the cost of land and construction, is extremely high. That’s why the lyric made popular by Ol’ Blue Eyes seems so appropriate.

On one hand, New York has a few thriving health systems embarking on expansion plans costing hundreds of millions of dollars.

A good example can be found at a major conglomeration of health systems on Manhattan’s Upper East Side. There, New York Presbyterian Hospital and the affiliated Joan and Sanford I. Weill Medical College of Cornell University is nearing completion of a 13-story, 330,000 square foot ambulatory care center and medical education building. In addition, Weill Cornell recently announced plans for another major project, a $650 million, 350,000 square foot biomedical research building on 69th Street and York Avenue as well as a 19-story mixed-use tower to house employees and medical offices.

On the other hand, New York City is home to quite a few smaller, struggling providers trying to contend with the big and healthy systems. A few are in bankruptcy protection, several are selling off valuable, ancillary real estate to garner cash, and a handful of others are trying to avoid being closed by a recent state initiative to reduce healthcare costs.

As all of this is going on, the city of the haves and have-nots is not seeing much healthcare construction. Reports and observers indicate that there are mostly only small projects taking place in each of the boroughs to repair older facilities, and there are some modest new medical projects and redevelopments under way.

The struggle

But when it comes to blockbuster projects, the cranes are fairly quiet over healthcare sites. In recent testimony before the New York Senate, Kenneth Raske, president of the Greater New York Hospital Association, stated that construction is light among the city’s hospitals because operating margins are well below the national average.

Mr. Raske testified that while most hospitals fund capital projects with 50 percent cash on hand and 50 percent borrowing, the average New York hospital in 2003 could pay for only 18 percent of a project with cash on hand.

Another statistic, this one from the Healthcare Association of New York State, indicates that the state’s hospitals, many of which were built more than 30 years ago, had a cumulative operating loss of $127 million in 2004. That does not bode well for major capital improvements across the board.

Officials with the Greater New York Hospital Association and the Healthcare Association of New York State indicate that the healthiest systems – and those that can afford to invest in their facilities – are major institutions, such as medical schools.

Adding to the fact that New York is an expensive place to embark on construction projects, Robert Levine, senior vice president of Turner Construction Healthcare, says the state’s healthcare regulations are as stringent as they come. For example, the state puts a strict limit on the reimbursement of capital costs, says Mr. Levine, who oversees healthcare construction for Turner in the region.

“In my decades in the business I’ve never seen the healthcare construction industry as strong as it is throughout the country,” says Mr. Levine. “But for some reason, the restrictions included, not much is taking place in New York.

“You’ve also got to realize that the cost of doing business there for the hospitals is very expensive. I would say we’ve got just two major projects on our radar right now, and they’re not right in the city.”

Mr. Levine noted that it’s been at least 20 years since a new, major replacement hospital has been built in New York.

Turner is, however, overseeing early work on a project that could result in a potential replacement hospital for Orange Regional Medical Center in Wallkill, just up the Hudson River from New York City. Mr. Levine says the new hospital would be a consolidation of services provided at two aging facilities, the 1915 Arden Hill Hospital and the 1929 Horton Medical Center. The project, however, is on hold because of budgetary issues.

Berger in the fire

Perhaps the biggest news concerning the New York hospital scene, however, was a recent recommendation by New York’s Commission on Health Care Facilities in the 21st Century to close nine hospitals in the state, including five in the New York metro area.

The goal of the commission, which was appointed in 2005 by Gov. George Pataki, is to rein in healthcare costs. The commission is often referred to as the Berger Commission, which stems from the name of its chairman, Stephen Berger – the state’s commissioner of social services back in the 1970s and, later, the engineer of New York City’s fiscal turnaround.

The five New York City hospitals on the list of recommended closures are the 205-bed New York Westchester Square Medical Center in the Bronx, the 254-bed Victory Memorial Hospital in Brooklyn, the 399-bed Cabrini Medical Center in Manhattan, the 150-bed St. Vincent’s Midtown Hospital in Manhattan and the 251-bed Parkway Hospital in Queens.

Since making its recommendations – and even long before issuing them – the Berger Commission has come under heavy fire. Several systems have vowed to fight the closings through the court system.

It looks as if Westchester Square Medical Center has received a reprieve from closure, as a district judge recently issued a temporary restraining order barring the New York State Department of Health from closing the hospital. Westchester had filed a lawsuit challenging the state’s right to close the hospital, calling into question the legality of the legislation that created the commission.

The suit, which was filed by the New York Lawyers for the Public Interest and the Manhattan law firm of Chadbourne & Parke, argues that the Berger Commission should not have a legal right to close hospitals because the commission is part of the executive branch of the state government. That power should rest only with the legislature, according to the lawsuit. The attorneys also argue that the Berger commission violated the state’s open meeting laws. At least two other hospitals, including Cabrini Medical Center, have filed lawsuits to block the closures.

According to Berger, about one-third of the hospitals chosen for closure or restructuring volunteered to do so. Most of those chosen for restructuring are hoping to receive part of $1 billion in state funds and $1.5 billion in federal funding.

In defending its actions, the Berger Commission announced that the state of New York has about 60,000 beds – 10 percent more than necessary. The commission’s plan calls for eliminating about 4,200 of them.

The commission also notes that the state’s Medicaid costs are $9 billion a year, the highest in the nation. The closure and restructuring plan would save about $1.5 billion annually, according to Mr. Berger.

“It’s an interesting time for healthcare and healthcare real estate in New York,” says C.J. Fellini, managing principal of New York-based Noyack Medical Partners LLC, an owner and developer of medical properties. “Strong systems and institutions will always be strong in New York, while others will continue to struggle. If those hospitals are closed, there are some systems that could benefit.”

But Mr. Fellini and others are not sure the hospitals will indeed be closed.

Unique med office scene

The medical office scene in New York seems to be unlike anywhere else.

Paul Wexler, who has been a healthcare real estate broker in the city for 22 years and is president of Corcoran Wexler Healthcare Properties, says medical office rents are “very high” in New York.

“But I wouldn’t say they are necessarily ridiculously high when compared to the rents for general office,” he says. “Everyone knows this is a very expensive market, but then again you’ve got to remember that in New York City you’ve got so many different scenarios. Each doctor and each space is a totally different story and rents can range anywhere from $30 a square foot to $100, depending on the proximity to a hospital, location, condition of the building and lots of other factors.

“But one thing is for sure, occupancy rates are very high and demand far exceeds supply.”

Like in other parts of the country, many docs are complaining about losing income to the rising cost of doing business and cuts in reimbursements. In many other parts of the country, however, physicians are being given the chance to supplement their incomes by investing in the medical office buildings (MOBs) where they rent space.

“That takes place to some degree in New York,” Mr. Wexler says. “But those opportunities are very limited, mainly because the real estate market is so different here. What we see more of is doctors being given a chance to own real estate through condos or co-ops.”

Mr. Wexler noted that one project he’s marketing in the Fort Green area of Brooklyn is to have 27 residential units above nine medical office condos. So far, eight of the medical condos have been pre-sold in the “Greenhouse,” which is being developed by David Weiss and Jonathan Jacobs.

Because demand is so high for medical offices, Mr. Wexler says there are some other projects in the pipeline, most of which cannot yet be announced. He did cite one example, however: New York-based Taconic Investment Partners has a 30,000 square foot MOB planned for East 75^th Street, between York and 1^st Avenue in Manhattan.

And while many doctors occupy office space in buildings affiliated with hospitals, the city is also home to a huge number of independent physicians who rent space on the street level of residential buildings, in designated portions of general office buildings, and in freestanding MOBs dotted throughout the landscape.

He adds that there are a few hospital-affiliated MOBs in the pipeline as well, such as one planned for the Mount Sinai campus in Manhattan.

No better place to sell

Meanwhile, smaller health systems and institutions are doing their best to keep up with the bigger systems. Mr. Fellini says he often talks to health systems considering selling or repositions real estate in order to raise funds. He adds that some systems are looking at potential consolidation plans to become more efficient.

According to various reports and sources, several hospitals are selling, or have sold, non-core real estate assets, including parking lots and adjacent residential properties, for big money in the inflated New York City real estate scene.

For example, North General Hospital in Manhattan is expected to sell an adjacent parking lot for quite a windfall, as several developers are interested in the property for potential mixed-use projects.

In addition, the New York College of Podiatric Medicine has announced that it plans to sell its parking lot at 1800 Park Ave. for about $60 million. And, New York Downtown Hospital recently sold a 1-acre parking lot it owned in Lower Manhattan for $84 million.

Construction began in October on ForestCityRatner Cos.’ future office tower on the site, the 75-story Frank Gehry-designed Beekman Tower. Completion is expected in 2009. The firm is an affiliate of Forest City Enterprises Inc. (NYSE: FCE), one of the nation’s largest publicly traded real estate development firms.

Other hospitals expected to sell off ancillary real estate include Brooklyn Hospital in Fort Green, Victory Memorial Hospital in Bay Ridge, Parkway Hospital in Forest Hills, and Cabrini Medical Center, which owns an entire block near Gramercy Park. Reports indicate the site could be converted to a condo development.

Construction light

While the healthcare construction scene is somewhat light, there are some cranes dotting the hospital landscape.

For example, NewYork-Presbyterian Hospital/Weill Cornell Medical Center recently received approval to proceed with additional expansions of its hospital facilities. The expansion includes the construction of a four-story building to be used primarily for clinical and diagnostic procedures, as well as the addition of another floor on top of the system’s new Greenberg Pavilion.
Meanwhile, NYU Medical Center continues to make progress on a three-year, $160 million project to bolster its Tisch Hospital. One component of the plan entails developing a new ambulatory heart center, which is scheduled to open in January 2008. Other components include new ambulatory surgery center on 38th Street and First Avenue and expanding the hospital’s emergency department.

In addition, NYU recently announced plans for the future $200 million, 120,000 square foot NYU Child Study Center. The finished facility would be the world’s largest child and adolescent psychiatric treatment, research, and training facility.

Memorial Sloan-Kettering Cancer Center, which is located near Weill Cornell, is also moving forward with plenty of projects on the Upper East Side. In recent months, Memorial Sloan-Kettering opened its new $503 million, 558,000 square foot, 23-story Mortimer B. Zuckerman Research Center. And that’s not all the system has in the works, as it also has started construction on an adjacent seven-story, 135,000 square foot structure for breast cancer treatment and imaging that will be connected to the new research center. The projects are being built at Second Avenue and 66^th Street, the site of the well-known Beekman movie theater.

On the Upper West Side, construction is under way on a five-story, 140,000-square-foot addition to the Milstein Hospital of the NewYork-Presbyterian system. It will be named the Vivian and Seymour Milstein Family Heart Center – the family provided a $50 million gift toward the future facility. q

SIDEBAR FOR PAGE 14

Selected New York City medical real estate projects
■ Harlem Hospital Center, Manhattan. This $243 million project includes a renovation of the Martin Luther King Pavilion and construction of a new six-story facility with an upgraded emergency department, operating rooms, and diagnostic services. The project also calls for adding a parking garage and an emergency medical services garage. The project manager is New York-based TDX Construction. A joint venture of Philadelphia-based McKissack & McKissack and New York-based HAKS Engineers is in charge of building the parking facility and EMS garage.

■ Hospital for Special Surgery, Manhattan. This ambulatory facility, which is part of New York Presbyterian and the Weill Cornell Medical College, is one of the country’s highest-profile specialty healthcare facilities. In 2005, the surgical hospital embarked on a multi-year, $260 million expansion that includes a recently completed $64 million, 85,000 square foot expansion. Turner Construction of New York is the general contractor. Cannon Design, based in Grand Island, N.Y., prepared a master plan for the expansion and also designed the ambulatory facility. The latest expansion program will add floors on both the existing east and west wings of the hospital’s main building, and includes new patient beds, sterile supply space, and an ambulatory surgery center. The hospital is seeking approval from the New York State Department of Health for the overall program’s final phase, an arthroscopy and sports medicine center.

■ North Street Community, White Plains, N.Y. A quintet of developers going by the name North Street Community LLC has plans to redevelop the former St. Agnes Hospital in White Plains as a project with 353 independent living condominiums. The $150 million-plus project also would entail an assisted living and skilled nursing center on the 23-acre site. C.J. Fellini, a New York-based medical real estate developer and a managing partner on the project, says there is demand for at least 1,300 independent living units for people 70 and over in the White Plains area. The North Street project will be age restricted to folks 60 and older. The project will also include an 80,000 square foot medical office building, which is well more than 50 percent pre-leased. Mr. Fellini says the overall project is awaiting approval from the city of White Plains. The general contractor is Alfred Caiola and Benny Caiola of New York; the architect is New York-based Ehrenkrantz Eckstut & Kuhn Architects.

■ Mount Sinai Medical Center Medical Office Building, Manhattan. Mount Sinai razed a parking garage to make way for its future $70 million MOB, which officials say will free up space in the hospital for other projects. In addition, Mount Sinai’s medical school and research program is experiencing such rapid growth that officials say a $400 million expansion is needed. The only problem is finding space for such a project.

■ Kings County Hospital Center, Brooklyn. This 627-bed facility, which is part of New York City Health and Hospitals Corp., started a massive five-phase, half-billion dollar capital improvement project back in 1997. So far, two of the phases are complete. They included a 340-bed, 265,000 square foot inpatient tower and a 250,000 square foot Emergency, Diagnostic and Treatment Pavilion. Future and ongoing phases include the renovation of the hospital’s ambulatory care center, the construction of the seven-story, 300,000 square foot Behavioral Health Center, and the consolidation and centralization of other services. Construction on the behavioral center is slated for completion in summer 2008. The consolidation project, which will entail demolishing several structures and the building of parking structures, should be finished by 2009.

■ Stony Brook (N.Y.) University Hospital. This hospital on Long Island is continuing with its multi-year $300 million capital program. Ground was broken in spring 2006 on the latest project, a new 150,000 square foot wing and 150,000 square foot renovation of the existing hospital. Gilbane Building Co. of Providence, R.I., is the construction manager. q