Sunny days for Seattle’s med real estate

KEY CITY’S HEALTHCARE INDUSTRY SEES MAJOR BUILDING BOOM OF $1 BILLION

 

By Beth Mattson-Teig

 

The volume of healthcare construction in the Seattle metro area is staggering, with more than $1 billion in construction projects recently completed, under way or planned.

Virtually every major healthcare institution in Seattle is in the midst of some type of expansion campaign, according to sources in the Key City.

“The level of healthcare activity in the Seattle metro area is quite robust,” says John R. Pangrazio, a partner at NBBJ, a Seattle-based architecture firm. “There is a lot going on both in design and construction, and that level of activity is expected to continue over the next few years,”

The surge in construction in the Seattle metro area is mirroring the widespread healthcare building boom occurring throughout the state of Washington.

“There is more going on in hospital construction around the state in the last 24 months and next 24 months than there has been in any comparable period in the past 30 years,” says Robb Menaul, a senior vice president with the Washington State Hospital Association.

New construction and expansion is occurring across the spectrum from acute and ambulatory care facilities to diagnostic and treatment centers and medical office buildings (MOBs).

Activity in Seattle is prominent in large part because the region is home to a sizable concentration of healthcare facilities. Seattle’s King County alone offers 26 different hospitals – nearly 25 percent of the hospitals in the entire state.

The main explanation for that strong presence is the fact that King County is both large geographically and population-wise, with about one-third of the state’s 6.4 million residents living there, says Mr. Menaul.

Healthcare systems are moving forward with major capital projects as they adapt to market changes ranging from shifting demographics to advances in technology and a focus on a more efficient delivery of healthcare. In addition, healthcare groups also are finding more creative efforts to capitalize costly building programs.

Demand is driver

One of the basic drivers behind the new projects and expansions is simple population growth and shifting demographics. For example, Providence Everett Medical Center is pushing a $450 million expansion plan for its Colby Avenue campus to accommodate current and projected growth in Snohomish County, which lies just to the north of King County.

The Seattle-Bellevue-Everett Metropolitan Statistical Area (MSA) reported a population of 2.4 million in 2000, a modest 1.9 percent gain over the 2.03 million recorded in 1990. Most of the region’s growth is taking place in the suburbs. The eastern suburbs, North End and Southeast King County are the fastest-growing areas, mainly because they have the largest quantities of available land, according to Seattle sources.

Many healthcare organizations also feel the need to position facilities to accommodate a growing baby boomer population. Washington has been gaining recognition as a top retirement destination. In 2006, the net in-migration of residents for the state was 80,953, according to the Washington Office of Financial Management.

The state appeals to retirees in part for its scenery and outdoor recreation, as well as lower housing costs compared to nearby California, Mr. Menaul notes. “The elderly bring with them more health problems and a greater demand for health services,” he adds.

Aging facilities

Another key factor pushing the surge in construction activity is the need to replace or upgrade antiquated facilities.

“Some of these existing buildings are simply beyond their useful life, and there is a need for replacement facilities,” says Mr. Pangrazio of NBBJ.

A significant number of the Seattle-area hospitals were built in the late 1940s and early 1950s, sources say.

“Of course there have been upgrades over the years, but some of those hospitals still have the original shell,” Mr. Menaul says.

Swedish Medical Center, for example, is in the midst of redeveloping its three-block Cherry Hill Campus in Seattle. The original hospital at that location was built in 1912.

The facility, which Swedish bought in 2000, had been remodeled and expanded a number of times over the years up until the 1980s, but officials say it still needs a significant modernization.

Swedish is in the midst of transforming the aging facility to a research and education center. The renovation is about 75 percent complete.

Health systems in Seattle also are reorganizing their general hospitals in order to provide a more efficient delivery of patient services.

“We’re seeing more focus on specialty care, so more one-stop shopping for patients in specialties such as cardio, cancer and women’s and children’s,” says Bob Hutnik, principal in the healthcare studio at Callison, a Seattle-based architecture firm.

In addition, healthcare groups are upgrading facilities in order incorporate new technologies. For example, Swedish recently completed the first freestanding emergency department in the metro area – at its hospital in Issaquah, located southeast of Seattle.

The fully accredited emergency department embraces technology by combining telemedicine and technology at a very high level, Mr. Hutnik says. The facility can service a stroke patient, and use technology to access both expertise and patient information that may be located at another facility.

Medical office takes off

The surge in hospital construction is giving MOB development a boost. The Seattle metro currently has six new MOBs under construction totaling about 320,000 square feet, with another six MOBs proposed that would total approximately 254,000 square feet, according to data provided by the Seattle office of Grubb & Ellis.

The MOB construction is largely a reflection of high occupancies – hovering at about 97 percent in the roughly 4 million square feet of MOB space in the Seattle market.

The majority of the MOB space, about 3 million square feet, is located in King County.

Dominant healthcare hubs such as Seattle’s First Hill and the area around Overlake Hospital Medical Center, which is the main hospital serving the growing suburb of Bellevue, are reporting the lowest vacancies at 1 percent, according to Paul Carr, vice president in the medical office properties group at CB Richard Ellis in Seattle.

New MOBs are being built around all of the campuses in the region, according to Mr. Carr. But despite the considerable volume of MOB construction, there has been very little speculative activity, he adds.

Examples of new projects include Opus Northwest’s is wrapping up the development of M Street, a 40,000 square foot MOB in Seattle’s highly concentrated First Hill healthcare corridor. The project is expected to open in June 2007.

Also, Alexander Commercial Real Estate is developing a 94,700 square foot MOB in downtown Seattle that is expected to open in March 2008, according to Grubb & Ellis.

Costs are main challenge

Certainly one of the main challenges threatening healthcare expansions and renovation work is the recent rise in construction costs.

“The price of construction is going up crazily,” says Mr. Menaul. “Those rising costs are making projects a lot more costly, and hospitals are having to modify original proposals so they can come in under budget.”

Healthcare networks are finding more create ways to finance that construction, such as teaming up with third-party developers for off-balance sheet projects.

Case in point is Harborview Medical Center, where increasing construction costs left a $30 million gap in funding for its new 14-story medical office complex. As a result, hospital owner King County plans to lease back the building from a private corporation until the construction bonds are paid off. The county will then take ownership of the building, which will encompass the block between Ninth and Terry avenues and Jefferson and James streets.

“We’re seeing several examples of private developers bringing capital and resources and then structuring a master lease with the hospital,” Mr. Hutnik says. He points out that Houston-based Hines was the developer of the new Evergreen Plaza, a 100,000 square foot MOB next to Evergreen Hospital in growing Kirkland.

Rather than hospitals self-capitalizing or using their bonding capacities to finance construction, they are increasingly looking to partner with other providers or third-party developers to help lessen the financial load, he adds.

Another trend is seeing more partnerships and joint ventures between universities, academic facilities and other healthcare providers.

An example in Seattle has the University of Washington partnering with Children’s Hospital and the Fred Hutchinson Cancer Research Center in the formation of the Seattle Cancer Care Alliance.

“I believe the market is trying to get away from the competitive nature and move towards more collaborative efforts,” Mr. Hutnik says.

Certainly one big factor driving that shift is the need to pool resources. Hospitals and healthcare providers need to conserve capital, and one way to do that is by avoiding duplication of services, he adds. q

Beth Mattson-Teig specializes in writing about commercial real estate.

Selected Seattle Area Medical Real Estate Projects

 

■  Harborview Medical Center, Seattle.  The hospital, owned by King County, is seven years into a decade-long, $283 million capital program. Goals include remedying significant seismic deficiencies and expanded medical care capacity. Key program features include seismic improvements to the North Wing trauma center tower; a new nine-story inpatient wing adjoining the existing facility; and a new five-story multi-purpose facility with underground parking to house specialized services such as research laboratories and the King County Medical Examiner. The overall project includes the 14-story, 450,000 square foot Ninth and Jefferson Building and the five-story, 244,000 square foot inpatient expansion building, both of which are located on First Hill. The estimated completion date is November 2008 for Ninth and Jefferson building, and March 2008 for the inpatient building. Seattle-based NBBJ is the project architect. New York-based Turner Construction Co. has been selected to serve as the general contractor for the Ninth and Jefferson Building.

 

■  St. Anthony Hospital, Gig Harbor, Wash. This future $135 million, 217,000 square foot hospital is under construction in Gig Harbor, about 10 miles west of Tacoma. Ground was broken in April on the 80-bed hospital, which is part of the Franciscan Health System and its parent organization, Denver-based Catholic Health Initiatives. The project includes an adjacent MOB. Both the hospital and MOB are slated for completion in early 2009. St. Anthony Hospital will offer the full range of medical care, including 24-hour emergency services; medical, surgical and critical-care units; inpatient and outpatient surgery; a heart catheterization laboratory; and diagnostic imaging. A sky bridge will connect the hospital to the adjacent 80,000 square foot MOB, which will house doctors’ offices and outpatient services. Brookfield, Wis.-based Hammes Co. is the project manager, the Seattle office of Zimmer Gunsul Frasca Partnership is the architect; and Seattle-based Sellen Construction Co. is the general contractor.

■  St. Francis Hospital, Federal Way, Wash. This hospital in Federal Way, which is about 20 miles south of Seattle, is planning a 36-bed expansion. Part of the project would include a 21,600 square foot Critical Care Unit that will house 30 beds for intensive care and progressive care patients. The expansion would be built atop the existing emergency department, and is scheduled for completion in the summer of 2008. The Hammes Co. is the project manager; Skanska USA Building Inc. of Parsippany, N.J., is the general contractor; and Seattle-based ABKJ is the structural engineer. The architect is Mahlum Architects of Seattle.

■  Valley Medical Center, Renton, Wash. The hospital is in the midst of a three-phase, $193.2 million capital master plan. The $25.2 million first phase has been completed and includes a family and birth center and a neonatal intensive care unit. The $49.5 million second phase is under construction, with a major expansion and renovation of the hospital’s surgical wing. The project spans 138,450 square feet and the estimated completion date is summer 2007. NBBJ is the project architect, and Seattle-based Absher Construction Co. is the general contractor. The third phase calls for a $105 million, seven-story emergency department with 200,000 square feet. It would be built atop a $13.5 million utility plant. Construction on the third phase is expected to begin in summer 2008. NBBJ is the architect on the third phase.

■  Swedish Medical Center, Seattle. Swedish has begun construction of an innovative, dedicated orthopedic facility on Seattle’s First Hill. Once completed, the new 372,000 square foot building would be the first of its kind in the Pacific Northwest and one of the largest in the nation. The seven-story orthopedic facility would include 84 inpatient beds (56 initially and 28 to be added in the future), 10 dedicated orthopedic operating rooms, a dedicated sterile-processing area, 15 flexible pre-operative/recovery beds, 13 post-anesthesia care-unit beds, and an outpatient pharmacy.  Four floors of underground parking are included. The estimated completion date is spring 2008. NBBJ is the project architect and Sellen Construction is the general contractor.

■  Overlake Hospital Medical Center, Bellevue, Wash. Overlake is planning a major expansion of its South Campus. The project’s first phase would include a five-story, 138,450 square foot, 104-bed patient tower. The design would allow for the future replacement of older buildings and the addition of four more floors. A 40-bed emergency trauma center is planned for the ground floor; the estimated completion date is summer 2007. NBBJ is the project architect and Bellevue-based GLY Construction Inc. is the general contractor.

■  Seattle Children’s Hospital, Seattle. Seattle Children’s in recent weeks announced that it has acquired an additional downtown city block – currently a parking lot — for $43.6 million in order to complete its growing research campus. The property has a development capacity of about 900,000 square feet. Children’s plans additional improvements to two existing facilities that it acquired in late October 2006 – the 1900 9^th Ave. building, which has 216,088 square feet, and the 1915 Terry Ave. building, which has 251,095 square feet Together the properties form a contiguous campus that will be devoted to pediatric biotech research.

■  MultiCare Health System, Tacoma, Wash. MultiCare is planning to significantly expand the emergency department at its Tacoma General Hospital and Mary Bridge Children’s Hospital and Health Center. MultiCare also is finishing construction of a new $38 million, 80,000 square foot Comprehensive Outpatient Center at MultiCare Gig Harbor Medical Park. The $38 million project is expected to be complete in June. q