Cover Story: Not your grandfather’s Erdman

The nearly 70-year-old HRE firm keeps evolving to meet changing client needs

By John B. Mugford

One firm, 6,000 projects!

Let that figure sink in for a minute. That’s the number of healthcare facility projects that Madison, Wis.-based Erdman has delivered in its nearly 70-year history as a designer, builder and, in more recent decades, developer.

Even in a sector where many firms have long and prolific histories, it’s safe to say that 6,000 figure far exceeds the number of projects delivered by anyone else in the healthcare real estate (HRE) business.

In its earliest days and for many years the firm stuck to its knitting as a design-build firm and was long known as Marshall Erdman & Associates. Yet one cannot pigeonhole today’s Erdman in that way because the firm has continued to evolve and branch out into new property types and services, or “verticals,” as it calls them. It has four verticals, in fact, including its original focus on design-build.

The other verticals are:
■ advisory and consulting, in which Erdman can help a client pinpoint a location in which to build a facility or offer services, among other functions, including providing master planning for projects;
■ development, in which Erdman fully leads a project through the planning, execution and, if need be, can finance and own the facility developed for a client; and, finally,
■ performance measurement, in which the firm can analyze the performance of a facility, not only in terms of its efficiencies, or lack thereof, but whether it is successful in a business and strategic sense as well.

“We have definitely made an effort in recent years to educate our clients on the full range of services that we can offer them,” says Rustin Becker, who started his career as an architect and, after joining Erdman in 2001 as a project executive and working his way up through the ranks, has been president and CEO since 2019.

“Certainly, we still engage in a lot of projects in which we perform the architecture,” Mr. Becker says. “But there are also many projects in which we’re doing the architecture as well as the development and working with an outside contractor. We have a very adaptable, flexible model based on what’s in the best interest of the project and the client, as opposed to having one model in which a company would try to find a project that its model fits in with.”

In addition, Erdman in recent years has branched out into designing, building and developing senior living facilities. That aspect of the business currently accounts for about 30 percent of the firm’s workload, with officials anticipating that it one day will rise to 50 percent of the business.

Not your grandfather’s Erdman

This newer version of the Erdman business model, which has been evolving during recent decades, appears to be flourishing, as the firm has about 40 projects in planning or under construction. In recent years, Erdman has averaged about 30 projects annually.

When asked about some of the projects Erdman is currently working on, Mr. Becker rattled off about a half-dozen examples. “We’re involved in projects states from Washington to Florida and from Pennsylvania to New Mexico,” he says.

“On the healthcare side, we’re in the process of completing a brand-new, and the first FMF, or freestanding medical facility, in Maryland for the University of Maryland at Upper Chesapeake Health in Aberdeen (Md.),” Mr. Becker notes. “It has an inpatient acute-care component on the behavioral health side. And then on the medical side, it’s all outpatient with a freestanding emergency department, imaging, ASC (ambulatory surgery center) and a clinic. On that project, we’re doing the design and construction side. It’s a roughly $60 million project with a total of about 142,000 square feet of space.”

He adds that Erdman is also doing a vertical expansion at Saint Luke’s Hospital, part of the two-hospital St. Luke’s system based in Duluth, Minn., where Erdman has completed a number of projects for the system over the years, including a 176,000 square foot medical office building (MOB) and a 129,300 square foot expansion of the emergency department (ED).

“The new piece of the project is probably a $46 million, $47 million project,” Mr. Becker says, “and it’s adding three stories over a floor focused on interstitial services in a building that we built a couple of years ago, and it contains all critical care beds.

“We’ve also been doing plenty of work on the physician side as well, as we’re working on an ambulatory surgery center just outside of Pittsburgh, in Greensburg, Pa., for Aestique,” a locally based cosmetic surgery group. The future 14,500 square foot surgery center, which is scheduled for completion in late 2023, will provide cosmetic and reconstructive surgery, general surgery, gastroenterology, gynecology, neurology, oculoplastic surgery, ophthalmology, podiatry and pain management as “additional services such as orthopedics and more extensive spinal surgeries,” according to Erdman.

Mr. Becker also notes that Erdman has broken ground on $9.6 million project for Indiana Regional Medical Center; started a $16.7 million, 40,000 square foot project for The Orthopedic Clinic of Daytona Beach, Fla.; is “working through the early planning stages of what will probably be a $50 million neuroscience center for Northwest Community Hospital” in Arlington Heights, Ill.; is doing the planning work for a future $35 million small-format hospital for Quincy Medical Group in Quincy, Ill.; and is doing the planning work for a new community hospital in Riverton, Wyo.

Senior living work is growing

As noted earlier, Mr. Becker says the senior living portion of Erdman’s workload has expanded significantly and is expected to expand even more in the coming years.

“We’re really seeing strong growth, and strong long-term growth potential for our senior living side of the business, and we think it will one day be half of our business,” Mr. Becker says. “The COVID-19 pandemic caused a bit of a stall on the senior living side, but that’s showing signs of coming back. On that end of the business, I would say we’re touching about 40 percent from an A/E (architecture and engineering) perspective, and maybe 60 percent from a fully integrated development design and construction opportunity.”

Since it started developing senior living facilities in 2011, Erdman has completed eight projects and currently has 15 either in planning or under construction.

“We’re studying markets across the country and identifying markets through our Advisory Service Practice, whose demographics research is able to find the strongest markets, which allows us to then leverage the identified sites and go vertical,” says Greg Markvluwer, VP of real estate development.

A long history in healthcare

As noted, Erdman undoubtedly has the longest history of any firm involved exclusively in HRE projects.

Marshall Erdman & Associates (MEA) was incorporated in Madison in 1951 by local architect Marshall Erdman, who had started a construction company in the late 1940s. Mr. Erdman’s firm worked on a variety of residential and commercial projects – some for fellow Wisconsinite and world-renowned architect Frank Lloyd Wright – before zeroing in on the healthcare sector in the mid-1950s.

By then, MEA had started to do work for small physician groups, designing and building what the firm called “doctors’ parks,” which were collections of smaller MOBs in the 2,500 square foot to 5,000 square foot range. This part of the business continued to grow and, within a few years, MEA was almost entirely focused on the sector.

For the next five decades or so, MEA was focused on designing and building medical facilities. It grew drastically over that time, consistently ranking as the country’s top healthcare design-build firm in terms of dollar volume, square footage and number of employees.

After Mr. Erdman passed away in 1995, his family remained in control of the ownership of the firm until late 2003. That’s when the Erdman heirs sold the company to a private equity firm, MEA Holdings, which included two Milwaukee-based firms, Luber & Company and Baird Capital Management.

It was after MEA Holdings acquired the firm that the company began developing and financing projects, adding to its design-build capabilities.

In a 2008 article in Healthcare Real Estate Insights™, Scott Ransom, then the CEO, said the firm was often so busy with projects that its executives asked themselves: “Are there opportunities here to bring in a capital partner?”

By 2007, after doing its due diligence in looking for a large partner, MEA announced that it would be acquired by Charlotte-N.C.-based Cogdell Spencer, then a publicly traded real estate investment trust (REIT) focused on owning and managing medical office buildings (MOBs). The $247 million merger created what officials at the time said was the “most integrated” healthcare facilities firm in the country.

After five years or so, Cogdell Spencer announced that it was being acquired by one of the country’s largest healthcare REITs, Chicago-based Ventas Inc. (NYSE: VTR), in a deal topping $760 million.

Instead of being rolled into Ventas, Erdman officials decided to break out on their own once again. The firm was acquired by an affiliate of one of its previous co-owners, Lubar & Company, led by David Lubar, who is still the principal owner today.

Through it all, Erdman has remained based in Madison, Wis., and it has about 100 employees. In addition, the firm has a number of team members working remotely throughout the country who are able to gather when needed in what could be considered regional offices in states such as Florida, North Carolina, Michigan, Ohio, Kentucky, Texas, Colorado and Washington.

“So since the COVID-19 pandemic, we, like many other companies, have used remote work much more and what were once considered our regional offices have become more of what we call gathering spaces, where team members who want to get together have a landing spot to meet,” Mr. Becker explains. “I really don’t see us moving back from that, as we’ve learned a lot from this new type of workplace and we have been doing it effectively.”

The Erdman way

Even though it has branched out and expanded its services over the years, Erdman still maintains “tight control” over its projects, ensuring they are completed on time and on budget, without many change orders.

“We have quite a few projects that we do that architecture only,” Mr. Becker notes, “and then we have a number of projects where we do the architecture and the construction, as we are licensed architects, engineers and general contractors in about 48 states – I realize there are 50 states, but we just don’t focus on Alaska and Hawaii.”

He notes the firm does not necessarily “self-perform as a general contractor (GC),” but when working on many projects “we are more like a CM (construction manager) in terms of hiring multiple subcontractor trade partners. But we deliver very predictable results, as over the last $1.6 billion or so of healthcare projects that we have performed, we’ve had a change order rate that’s around 1.62 percent.

“So, we do maintain very tight control, which I think comes from providing that upfront, advisory lens, which goes back to the fact that Greg (Markvluwer) has a strong lens on the right way to structure a transaction. And, the programming and planning side area of our organization is also incredibly effective at deploying the services they bring to the table.”

Erdman is also very adept at taking every aspect of a project, from the initial planning and land acquisition, to delivering the project on opening day.

“The opportunities that we’ve been having great success with currently,” Mr. Becker notes. “Whether it’s for a health system client, or perhaps a physicians’ group, like an orthopedics group, as an example, that might be thinking about a new surgery center, and they would like to have a firm be their single source for such a project, we can take it all the way from the concept, through the drawings and to completion, including providing the capital. In those cases, we really provide a great solution for the physicians because they have their own practices to run and stay focused on.

“And for us to be able to provide a single lease rate, for instance, and for us to say, ‘Here is the entire scope of the project. We will deliver it by this specific date.’ This is a great option for such a group, and they are turning to us for our whole-project solutions.”

Mr. Markvluwer adds that Erdman is just as happy to provide all of the capital for a project – as it has a stable of investors to turn to, including family offices, high net-worth individuals, REITs and private equity firms. Or, if the client prefers to own the project, he says, “We are certainly there for them as a fee-for-service developer. We can also create for them a joint venture partnership and own it with them. And that’s really the key of our offerings, that ability to be flexible and to do great work no matter what the financial structure is, because we’re happy to do any type of project.

“The birth of our development division was based on how we can best serve our clients and how can we best meet their needs. And if that’s doing a fee-for-service project, then that is what we will do. If it has us taking an equity position, either in a partnership or as the full owner and developer, we’re happy to do that as well.”

Of the 30 or so projects that Erdman does per year, it is typically involved in the ownership of four or five, he says.

Flexible ownership structures

When it comes to working with hospitals and health systems, Erdman is open to any ownership structure, Mr. Markvluwer says.

“We’re working with a health system out of Oklahoma right now and they’re looking at building a new medical office building with a surgery center,” he notes. “It’s a pretty large project, about 100,000 square feet, and initially their plan was to pay cash for it, as they wanted to own it themselves.

“However, after they took the plan to the board, the board came back and said, ‘Why don’t you take a look at having Edman put together the debt solution as well as the capital and give us some options?’ That’s the (type of) flexibility we offer.”

Mr. Markvluwer adds that in such an instance, where a client is weighing financing alternatives, “The project can still be moving forward, and it can still go through all the planning and design. And when they decide whether to own it or have us own it, we’re happy to do that. What we provide is the ability to not have the project come to a stop while that aspect is being worked out.”

A health system that has engaged Erdman to provide both fee-for-service projects as well as Erdman-owned projects is St. Luke’s in Duluth, for which, as noted earlier, the firm has designed and built several projects on the system’s expanding campus.

“St. Luke’s is a really good example in the sense that they were looking to grow and to acquire physicians, in order to compete more effectively with another health system, and they needed an outside capital solution,” Mr. Becker says. “So we did a development project to expand the hospital with a full third-party capital solution. That asset is now held by Ventas, they still hold that in their portfolio.

“But then there are other projects for which they’ve said, ‘We prefer to internally capitalize this but we’re looking to you (Erdman) to perform as a fully integrated development partner’ in terms of advising them and guiding them through the whole project.”

Mr. Markvluwer notes that one of Erdman’s biggest goals is to “help health systems and providers really understand where and how they should grow, and/or where and how they should shrink to support how they grow,” he says. “And then we are there for them to help find the best solution specific to each individual need, recognizing that some solutions probably want 100 percent third-party capital, while other systems might want to own 100 percent of a project. And there could be some in between.

“For the most part, we’re seeing health systems continue to move forward with their projects at this point in time,” Mr. Becker adds. “We’re not really seeing significant disruption there. However, we are seeing systems that are sometimes challenged in terms of looking at the upfront planning side of a project or real estate strategy because of all of the other priorities they have to navigate in running a health system. They are looking for some help in regard to their real estate.”

‘The ability to adjust and pivot’

“This is a company that was started by a Lithuanian immigrant, Mr. Erdman, who partnered with Frank Lloyd Wright and who was doing some construction work around Madison,” Mr. Becker says. “But that partnership with Frank extended beyond the projects they did back then, as Marshall became interested in the Usonian Housing movement,” which was Mr. Wright’s vision for a nation of modest but comfortable, well-made and beautiful homes for the working- and middle-classes.

“And Marshall was always very intrigued with, you know, access to clean drinking water, access to healthcare, those types of things,” Mr. Becker adds. “As a result, he also saw an opportunity to really answer the question, ‘How do we take a different model out to the healthcare market in terms of providing efficiently deployed facilities for providers that serve their patients in the best way?’ That’s where this started.

“And while we are a very different firm today, I think what’s made us successful is always having an open mind and having the ability to adjust and pivot.”

With its long history and the hundreds of clients it has worked for over the years, Erdman has a long list of repeat clients, as well as others referred to the firm by those satisfied repeat clients. However, the firm also continues to market itself to new clients through its business development team and in a variety of other ways.

“The last time we calculated how much of our business is repeat customers, it was a little over 60 percent,” Mr. Becker says. “We love inbound calls about a project or a relationship we’ve had in the past. But, we also certainly go out and talk externally to firms in a variety of different ways. So, I mean, some of that is sharing thought leadership in terms of how these market spaces are evolving and changing, and that, oftentimes, drives interest in Erdman.

“And I think if we stay on our game and continue to do what we’ve always done, while continuing to be flexible and willing to work with clients in whatever ways they need us to, we will continue to evolve Erdman well into the future.” ❏