DEMAND GROWS AS AREA SPREADS ITS WINGS
By Jessica Griffith
A one-two demographic punch is keeping Atlanta’s demand for healthcare ahead of its supply.
“We’ve got a double whammy going on,” says Thomas W. Tift III, president and CEO of Atlanta-based HealthAmerica Realty Group. “Atlanta is growing so fast plus the baby boomers are aging and that is putting a real stress on the healthcare system here.”
The metropolitan area just keeps expanding, says Carleton A. Ohly, president, principal and co-founder of healthcare developer Meadows & Ohly LLC, which is based in Atlanta.
“I am an Atlanta native and places like Flowery Branch, Forsyth County and Cartersville used to be almost an overnight drive,” he says. “Now, with the interstates, they’re just suburbs.”
Metropolitan Atlanta includes 28 counties and about 5.4 million people, making it difficult to summarize the healthcare real estate market. The metro area also has no natural boundaries, which means residents keep moving farther and farther into suburbs and exurbs, with hospitals and physicians following those patients, says David Rubenstein, principal of The Miller Richmond Co.
Local real estate professionals divide the Atlanta area into multiple submarkets, several of which have experienced significant activity.
“It is hard to call Atlanta one giant market,” Mr. Tift says.
The Piedmont Hospital submarket is located in the Buckhead neighborhood, formerly a bar and party destination and now a center for upscale housing. Having a landlocked campus makes it difficult to add medical office space near Piedmont, Mr. Tift says.
Vacancies are very low, around 4 percent, says Norm LeZotte, managing director of the senior housing/healthcare group for Cushman & Wakefield of Georgia.
Most buildings are fully leased, adds Scott Taylor, president of Carter and Associates. The firm recently broke ground on a medical office building (MOB) 1.2 miles from Piedmont Hospital at Interstate 75 and Howell Mill Road.
“We were aware that Piedmont was out in the market looking for alternative locations for its outpatient facilities, so we secured the land and approached Piedmont,” Mr. Taylor says.
The 256,000 square foot Piedmont West Medical Office Park is scheduled to open in September 2008, and the site has room for a second, 200,000 square foot building. Piedmont Hospital has agreed to occupy 75,000 square feet in the new building and Mr. Taylor says the space will house outpatient surgical care.
Total project cost is more than $75 million. Rents are $32.50 gross and $22 net.
Established Pill Hill
The greatest concentration of healthcare facilities in the Atlanta area can be found in Pill Hill, where three hospitals converge: Children’s Healthcare of Atlanta, St. Joseph’s Hospital of Atlanta and Northside Hospital.
Of these, Northside has experienced the most construction in recent months. The hospital opened a 150,000 square foot MOB in 2005 and is expanding and renovating its women’s center on the main Sandy Springs campus. A new women’s center also is under construction on the Forsyth campus; a surgery center opened last year.
MOB vacancy rates hover around 5 percent for on-campus, Class A medical office space in Pill Hill, Mr. LeZotte says.
Physicians are looking for 15,000 to 25,000 square feet, but the spaces that are available tend to be smaller – in the 1,500 to 3,500 square foot range, he adds. Many practices are solving the problem by leasing non-contiguous offices on separate floors of a building.
HealthAmerica manages a 100,000 square foot building a mile from the St. Joseph’s campus and the owners are converting it from office to medical space. HCA already has leased 40,000 square feet for a surgery center.
Not only has the metro area’s population grown and expanded outward, but the number of children has grown rapidly as well. According to Children’s Healthcare, which owns two hospitals and operates another, the Atlanta area’s pediatric population is expected grow by 120,000 by the year 2009.
In response, Children’s Healthcare in 2004 embarked on a $365 expansion at its Egleston and Scottish Rite hospitals. Those projects are coming on line in phases starting this year and are adding a total of 70 beds – bringing each hospital’s total to 250 beds. The expansion project is the largest by one system in the history of Georgia.
In addition, Children’s Healthcare in February announced that it is planning to build a new $35 million hospital on Pill Hill in central Atlanta, on the site of the current Children’s Healthcare at Hughes Spalding Hospital. The Hughes Spalding facility is owned by Grady Health System, a public health system, and operated by Children’s Health. The plan calls for a $35 million project that would add new inpatient beds, a new emergency department, and other facilities and services.
North Fulton Regional Hospital in Roswell is expanding to serve this rapidly growing area of Atlanta, located north of the capital city.
“The younger population is driving a need for more primary care,” says Steve Hall, vice president of leasing and sales for HealthAmerica.
Tenet Healthcare Corp. (NYSE: THC) owns North Fulton Regional and, in its efforts to keep up with demand, is adding a $43 million patient tower with 37 beds, operating suites and post-anesthesia and critical care units. The hospital also is renovating its existing building.
These developments are creating a need for more medical office buildings, Mr. Hall says.
“The hospital is in a huge growth mode but there is no medical office space to accommodate that,” he says.
Engineering Design Technologies just completed a 27,000 square foot building on Upper Hembree Road, and Mr. Hall says another developer is considering some medical office condominiums in the area.
Existing space includes the 58,000 square foot North Fulton Medical Arts Center and the 1240, 1250, 1260 Upper Hembree medical plaza, with a total of 34,000 square feet. Some of the tenants in those buildings are planning to move to the new Engineering Design Technologies building, Mr. Hall says.
Growing Johns Creek
This newly incorporated city is home to the brand-new, 110-bed Emory Johns Creek Hospital. A 135,000 square foot MOB also is on the campus. Emory Johns Creek opened in February and replaces Emory Dunwoody Medical Center, which closed in December.
Lauth Property Group in Indianapolis is building a 95,000 square foot MOB across the street from the new hospital, says Todd Jensen, senior vice president for healthcare. The project broke ground this month (July) and will open in spring 2008. Mr. Jensen says several potential tenants have shown interest but no leases had been signed as of late June. Rental rates are $23.50 per square foot, net.
“Our analysis indicates there is demand,” says Mr. Jensen. “The demographics are fantastic and population density is good; plus growth rates and median income are strong.”
An MOB on the hospital campus is nearly full, he adds, noting that Lauth had been waiting for an opportunity to enter the Atlanta market for several years.
“Our man in Charlotte (N.C.) who covers Atlanta has been looking at the market for years,” he says. “He came to me and said, ‘I think I found the best site in all of Atlanta for medical development.’ When he told me the price, I told him to keep looking, but once I went there and toured the site, I immediately agreed with him.”
The site has room for a second building but, to date, Lauth has no such plans. However, Mr. Jensen says he has received inquiries from firms that might be interested in building an assisted living facility.
A pair of trends related to population growth will likely have an effect on the Atlanta healthcare market in the coming years.
Nearly every hospital in Atlanta needs more beds, and many of these hospitals are building satellites in outlying counties, Mr. Ohly says. Some of the satellite facilities contain patient beds while others focus on outpatient care.
One example is Southern Regional Medical Center in Jonesboro, south of Atlanta. Meadows & Ohly recently broke ground on an MOB at a mixed-use development called Spivey Station in Jonesboro. Construction on a surgery center is set to begin later this year and three additional MOBs are being planned.
The first MOB already is 85 percent preleased, and Meadows & Ohly has plans for an 80,000 square foot MOB on Southern’s main campus in Riverdale, located west of Jonesboro.
Docs take stake
Another potential force in the market is a shift from physician leases to physician ownership. This, too, is based on demographics.
“Atlanta has evolved from a market with a lot of small, solo practices,” Mr. Rubenstein says. “There has been a wave of consolidation in the last 10 years and we’ve developed a good stable of large, multilocational practices.”
This trend has occurred for several reasons, including a desire to streamline practices and the financial realities of managed care. As physicians consolidated, they began to purchase their own buildings or invest in shares of their buildings, Mr. Rubenstein adds.
“It is a good opportunity to leverage their size as a tenant into an investment opportunity,” he says.
“Physicians are investing,” Mr. Ohly says. “That is the preferred model for development in the Atlanta market.” Meadows & Ohly has about 700 physician partners in its MOB projects.
Carter is offering physicians equity in its new project near Piedmont, Mr. Taylor says.
Even so, most physicians indeed continue to lease space, Mr. LeZotte adds. The investment cost often is prohibitive, and most MOBs are sold to institutional investors with deep pockets and an appetite for the stability of the MOB market.
“We have a lot of medical office buildings listed for sale and the demand is off the charts,” he says. “It is hard for a physician group to compete with foreign capital investors.”
Mr. Hall says he has lost three tenants in two years after they bought or built buildings. He agrees cost can be a barrier, but rapidly growing practices face another challenge when looking to own a building: The space that fits today might be a squeeze next month or next year as more doctors join the partnership.
Tenant improvement costs also can tip the balance in favor of leasing, Mr. Hall says. For this reason, there has been more activity in second-generation space.
“We see that doctors are less interested when they see what they will have to pay out of pocket,” Mr. Hall says. “If a practice has to put out $30 to $40 per square foot, they may lease in an existing building instead. They are sharpening their pencils when it comes to specific transactions. The buzzword is to get equity, but when the costs come back, some physicians are unable to pull the trigger and they end up leasing.” q
Jessica Griffith is a business writer and a frequent contributor to Healthcare Real Estate Insights™.
Selected Atlanta Area Medical Real Estate Projects
■ North Fulton Regional Hospital, Roswell, Ga. This Tenet Healthcare Corp. hospital is planning a three-story, $43 million patient tower to add 37 beds to the hospital, bringing the total to 204. The tower also will house new operating suites, a post-anesthesia care unit and a 28-bed critical care unit. A renovation to the existing building includes a cafeteria, additional post-partum rooms and medical-surgical beds and a new dialysis unit.
■ Piedmont West Medical Office Park, Atlanta. Atlanta-based Carter and Associates broke ground in June on this 7-acre mixed-use project that is slated to include a 256,000 square foot MOB. The project is under construction at the northwest corner of Howell Mill Road and Interstate 75, two miles north of midtown Atlanta. Piedmont Hospital has agreed to lease 75,000 square feet in the building, which is scheduled for completion in September 2008. Piedmont plans to occupy the space with outpatient services. Cost is more than $75 million. The overall project is slated to include restaurants and retail space. Construction is slated for completion in September 2008.
■ Northside Hospital-Forsyth, Cumming, Ga. A $42.2 million, 103,000 square foot women’s center is under construction with completion scheduled for late 2008. Meadows & Ohly LLC of Atlanta is also developing the 84,000 Kennestone Women’s Pavilion Specialty Medical Office Building, which will be attached to the women’s center. Construction on the MOB is expected to start this fall with completion scheduled for fall 2008. These projects follow on the heels of other recent projects at Northside: A $39 million surgery center opened in July 2006, and a 42,000 square foot emergency department opened in December 2004.
■ Southern Regional Health System’s Spivey Station, Jonesboro, Ga. This Riverdale, Ga.-based hospital is building a 92-acre, mixed-use satellite property called Spivey Station in Jonesboro, a growing area south of Atlanta. The first phase of the project includes a 60,000 square foot MOB and a 50,000 square foot ambulatory surgery center (ASC). The project is taking place on land just off I-75 and Georgia Highway 138. For the MOB project, Meadows & Ohly is the developer while Brasfield-Gorrie LLC is the general contractor and CDH Architects is the design firm – all of the firms are based in Atlanta.
■ Paulding Physicians Center, Hiram, Ga. A new four-story, 71,500 square foot MOB being developed by Meadows & Ohly is under construction at the corner of Highway 278 and Bill Carruth Parkway in the city of Hiram, in Paulding County on the far western edge of the Atlanta metro area. The land is slated as the future home of WellStar Paulding Hospital, part of Marietta, Ga.-based WellStar. The MOB is to be connected to the future hospital, which will be a replacement for a current WellStar hospital located about five miles away in Dallas, Ga. The Paulding Physicians Center is slated for completion in the fourth quarter (Q4) 2007. A Certificate of Need (CON) application has been filed with the state of Georgia for an ambulatory surgical center (ASC) and imaging center to be located within the building.
■ Children’s Healthcare of Atlanta’s expansion project, Atlanta. Work started in 2004 on Children’s Healthcare’s $365 million expansion of its hospitals in Egleston and Scottish Rite. The projects, which will add a total of 70 beds and numerous other facilities and services, will be coming on line in the next two years. At Children’s Healthcare Egleston, north of downtown in the Emory area, the system is nearing completion on a five-story tower directly behind the main hospital facility. The building is to house the Sibley Heart Center, an enlarged emergency department, new surgical suites and operating rooms, an expanded outpatient clinic, and a four-level parking garage with 1,000 new parking spaces. Children’s Healthcare Scottish Rite, in the far northern part of the city, is adding two stories to the top of its building and constructing a 428-space parking garage below the hospital. The additional floor space will hold a pediatric brain injury unit, a new 54-bed emergency department, and space for radiology and diagnostic services. In addition, Children’s in recent months announced that it plans to build a new hospital in the Pill Hill area of the city, on the site of Children’s Healthcare of Atlanta at Hughes Spalding Hospital. Plans call for the new hospital to be built on the site of the current parking lot and to be complete in 2009. The newer 1983 building on the site would be renovated, under the system’s plans. Childrean’s Healthcare took over the operation of the children’s hospital in February of 2006 and the facility is still owned by the publicly owned Grady Health System. Initial plans call for a project that would cost about $35 million and add a new emergency department, renovated primary care facilities, new inpatient beds and on-site parking.
Paulding Physicians Center, Hiram, Ga. A new four-story, 71,500 square foot MOB being developed by Meadows & Ohly is under construction at the corner of Highway 278 and Bill Carruth Parkway in the city of Hiram, in Paulding County on the far western edge of the Atlanta metro area. The land is slated as the future home of WellStar Paulding Hospital, part of Marietta, Ga.-based WellStar. The MOB is to be connected to the future hospital, which will be a replacement for a current WellStar hospital located about five miles away in Dallas, Ga. The Paulding Physicians Center is slated for completion in the fourth quarter (Q4) 2007. A Certificate of Need (CON) application has been filed with the state of Georgia for an ambulatory surgical center (ASC) and imaging center to be located within the building.
Recently Completed Atlanta Healthcare Projects
■ Gwinnett Medical Center-Duluth, Duluth, Ga. This 81-bed hospital opened in 2006 and replaced Joan Glancy Memorial Hospital.
■ Emory Johns Creek Hospital, Johns Creek, Ga. This 110-bed, 282,000 square foot replacement hospital opened in February in the newly incorporated city of Johns Creek, near Duluth. The campus also includes a 135,000 square foot MOB. The hospital replaces Emory Dunwoody Medical Center, which closed in December.
■ WellStar Kennestone Hospital’s New Patient Tower, Marietta, Ga. This 633-bed hospital, which is part of the five-hospital, Marietta, Ga.-based WellStar system, opened a new patient tower in fall 2006, adding 84 patient beds for a total of 633. q
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