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Still Healthy
Southeast Health-Care Construction
Strong Again in '07
By Debra Wood
Fueled by an aging population, the Southeast health-care
sector remains robust and will likely see a significant number
of new starts in the year ahead.
"People will require increased medical services and
the competitive nature of hospitals will keep the market strong
in the long run," says Jennifer Coskren, senior economist
with McGraw-Hill Construction Research & Analytics.
At the recent Best Of/Outlook event in Orlando, she projected
more than 14 million sq ft in new health-care construction
this year, off 7 percent from 2006. "Levels are still
really strong compared to historic levels," she adds.
Robert Gambrell, senior vice president of The Robins &
Morton Group in Birmingham, Ala., agrees. "Most owners
are very aggressive, particularly in states that have favorable
reimbursement rates," he says. "We see a positive
future for health care."
Gambrell cited the Carolinas and Florida as strong due to
their reimbursement rates and population shifts to the Southeast.
Reimbursement rates are the payments that third parties, such
as Medicare, provide to the hospitals.
"We see renovations, but a big part is additions to
existing facilities and new, greenfield hospitals in surrounding
communities," Gambrell says.
At Carolinas Medical Center in Charlotte, Robins & Morton
is building a $104 million, 487,839-sq-ft, eight-story addition
to house the Levine Children's Hospital, scheduled for completion
in August. The company also is adding a $44 million, 170,797-sq-ft
bed tower and emergency department to The Villages Regional
Hospital in The Villages, Fla., which is expected to wrap
up in November.
And in Jesup, Ga., Robins & Morton broke ground in May
on a $37 million, 158,020-sq-ft replacement facility for Wayne
Memorial Hospital. It is scheduled for completion in December.
Robert Levine, vice president of Turner Healthcare of Brentwood,
Tenn., also reported an increase in replacement facilities.
He says that, nationwide, replacements have gone from three
or four several years ago to 25 to 30 today.
"We are rebuilding the hospital infrastructure across
the country," Levine adds. "We still have obsolescence,
a lot of old hospitals and tremendous demand."
New technologies, necessitating more equipment above the
ceiling, make it difficult to match up floors in a new addition
with the existing structure, and Levine says that's one reason
many health systems opt to replace rather than "patch
and match."
But not Cape Fear Valley Medical Center. Turner has embarked
on a $92 million expansion that includes a six-story tower
and renovations at the Fayetteville, N.C., campus.
Kevin Kuntz, executive vice president of McCarthy Building
Cos. in Atlanta, describes the market as being as busy as
it has been in a long time. The company has two Georgia projects
in preconstruction: one for West Georgia Health System in
LaGrange and the other for the Habersham County Medical Center
in Demorest.
"Resources are spread thin," Kuntz says. "In
some markets, big hospital systems want to team up with construction
managers and designers and go with a smaller group to work
on five or six projects, pushing it more to a teaming environment."
Although interest rates are relatively low and money available,
Levine anticipates more private equity investment in hospitals
in which a private developer would build the facility and
lease it back to the hospital, which would operate it.
Levine says such private financing to design, build and maintain
health facilities is popular in the United Kingdom and Canada.
"I see it starting in this country," says Levine,
who offered as an example Louisiana State University's planned
$300 million replacement hospital in Baton Rouge. "The
bottom line is if you are in the health-care business, there's
no reason to own the real estate."
Bigger projects
McGraw-Hill's Coskren cited several major projects now under
way. Topping the list were two projects by Brasfield &
Gorrie of Lake Mary, Fla. The $178 million, 300,000-sq-ft,
eight-story All Children's Hospital replacement hospital in
St. Petersburg, Fla., broke ground in April and is scheduled
for completion in 2009. The $133.6 million, 15-story Florida
Hospital Orlando bed tower, which began in January 2006, will
house an expanded emergency department and the hospital's
cardiac program when it opens in 2008.
Coming in next were two projects Coskren pegged at $125 million:
a 439,000-sq-ft replacement facility for Southwest Florida
Regional Medical Center, being built by Skanska USA Building
of Tampa, and a 560,000-sq-ft replacement facility for Florida
Hospital - Ormond Memorial in Ormond Beach, Fla., now under
way by Robins & Morton.
Rod Creach, senior vice president and principal in charge
at Bovis Lend Lease Healthcare in Maitland, Fla., calls the
growth of children's services an emerging area. Health systems
also are focusing on specialty hospitals, such as Florida
Hospital's cardiac center.
"As an industry, we are seeing a trend toward much larger
projects," Creach says. "We're doing large-scale
expansion and replacement hospitals, especially in Florida."
Creach adds that in the past, the company worked on many
$10 million to $15 million jobs, but that now $100 million-plus
opportunities are more typical. He attributes that to new
technologies and changing service lines that make it more
expensive to renovate than replace an aging facility and population
shifts from inner cities to the suburbs.
Bovis recently completed the four-story, 269,000-sq-ft Emory
Johns Creek Hospital in Duluth, Ga., a $117 million joint
investment between Emory Healthcare of Atlanta and HCA of
Nashville. It also was wrapping up work in December on a $92
million expansion of Holmes Regional Medical Center in Melbourne,
Fla.
BGKS, a joint venture of Brasfield & Gorrie of Birmingham,
Ala., and M.B. Kahn Construction and Southern Management Group,
both of Columbia, S.C., is building the $154 million, 641,000-sq-ft
Medical University of South Carolina's Center for Advanced
Medicine in Charleston. It's a replacement facility and is
rapidly progressing toward completion this year.
Top North Carolina projects include the $125 million, 320,000-sq-ft
North Carolina Cancer Hospital and 105,000-sq-ft related office
building being built for the University of North Carolina
Hospitals in Chapel Hill by Skanska USA of Charlotte; and
the $108.4 million, 488,500-sq-ft Central Regional Psychiatric
Hospital in Butner. R.N. Rouse & Co. of Goldsboro, N.C.,
was scheduled to finish the North Carolina Division of Mental
Health's project this summer.
Costs Changing Projects
While material costs have risen across the industry, the
amount of money needed to build hospitals has jumped dramatically,
leading to some scaling back or delayed starts.
"It's exaggerated by the fact that health care's per-square-foot
cost is higher than most because of the nature of the work,"
says Creach.
McCarthy's Kuntz adds, "Costs are impacting how much
of a facility a hospital can build right now." He says
that escalations in materials and labor have totaled 10 percent
to 12 percent annually during the past two years versus an
annual increase of 3 percent to 4 percent before 2004. "But
we are seeing it ease a little, and that should help,"
he says.
At Turner, Levine reports average square-foot costs of $325
today, up from $180 to $200 per sq ft five years ago and $270
to $300 two years ago. He adds that reimbursement rates have
not kept up. He projects a 6 percent to 8 percent cost escalation
this year.
"One of the most common mistakes hospital systems' leadership
makes is to secure pricing from historical data that is not
current and thinking it will cost less than it does,"
Creach says. "Every day, we deliver news that what they
thought when they put the budget together two years ago was
adequate is nowhere near enough. They downscale or go back
for more money. That makes the project start later."
That presents problems for construction firms that have committed
teams to the job. Financial projections based on those contracts
go awry, creating a backlog of work but decreasing revenue.
"We cannot seem to get any project awarded to us started
when it was supposed to start," Creach says. "It
has a ripple effect across the business. Financial impact
is enormous."
Biomedical projects
In addition to hospital construction, several biotechnology
projects are cropping up in the Southeast.
A joint venture between Dole Foods and the University of
North Carolina system is developing the North Carolina Research
Campus on a former textile mill site in Kannapolis. Turner
Construction Co. of Charlotte broke ground on the first building
in February. The 311,000-sq-ft, five-story David H. Murdock
Core Laboratory Building topped out in August.
Duke University will run the biogenic and DNA sequencing
facility, expected to be completed late in 2007.
The state of Florida has committed major incentives to bring
research institutes to the Sunshine State. Scripps Florida-a
division of the Scripps Research Institute in La Jolla, Calif.-has
begun operating out of temporary facilities at Florida Atlantic
University in Jupiter, Fla., while it waits completion of
a permanent complex, scheduled for completion in 2009. Scripps
received $310 million from the state.
Scripps spokesperson Keith McKeown says he expects that Weitz-DPR
Construction, a joint venture between The Weitz Co. of West
Palm Beach and DPR Construction of San Diego, will break ground
early in 2007 on its three-building, 350,000-sq.-ft. complex.
Scripps is not releasing costs.
La Jolla-based Burnham Institute for Medical Research received
$155 million in state incentives and money from local governments
and private industry to locate a Florida research facility
at Lake Nona in Orlando. It plans to build a 175,000-sq-ft-
research facility within the next few years.
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