 Hospitals, doctors and developers are tentative about building, but optimistic about the future.
By Eric Jensen
When asked to describe construction and development prospects in the healthcare industry, care providers — as well as developers, designers and brokers who specialize in hospitals and medical office buildings — use words like “hesitant,” “mixed” and “tentative.”
“Hunkering down,” says Randy McGrane, managing director of Ensemble Investments. “There is a ‘bunker mentality’ out there, meaning ‘we’ll get by with what we have and not necessarily add capacity.’ ”
Late in December 2007, Banner Health announced the company would construct a four-story, $128M medical center near Queen Creek. The first phase of Banner Ironwood Medical Center is expected to be complete this fall. Less clear, however, is when the hospital will open.
In a move that can be seen as emblematic of development in the entire local healthcare industry, Banner Health will delay opening the Queen Creek facility for potentially up to a year, while Banner’s three other major projects will open as planned — including a new children’s hospital tower at its Banner Desert campus in Mesa. Healthcare providers throughout the Valley are similarly reevaluating construction plans.
Hospitals and physicians, whether their business is growing or not, seem most likely to wait a while before building — despite falling lease rates and construction costs.
 “In general, physicians tend to be pretty conservative in business,” says Dr. Robert Laney, who is the owner of Southwest Urgent Care in Mesa, and an emergency physician at Chandler Regional and Mercy Gilbert. “They’ll be hesitant to put a lot of capital in until they get a better sense of where things are going. Those that were considering expansion before will more likely be circling the wagons around their own practice.”
There’s no comprehensive list of which healthcare projects would have happened, but due to a host of factors, most hospitals will now wait to start any new projects.
“After we complete our current projects, we don’t anticipate we’ll be starting another project for a number of years,” says Bill Byron, Banner Health’s senior director of public relations.
Certainly, the current situation in healthcare could be far worse. According to the Arizona Department of Commerce, healthcare was among the few employment sectors in Arizona to grow in 2008.
McGrane says, “The effect of the economy on healthcare is not one of loss in demand for the service. ... Absent an outbreak of health, businesses will continue to operate. They are, however, operating at much lower margins than have typically been the case.”
A February 2009 report by the Arizona Hospital and Healthcare Association (AzHHA) bears out that statement: Hospitals’ operating margins declined 54% in the quarter ending September 2008, compared to the same quarter in 2007. Total income margins declined 91% in that same period. Shrinking margins have in turn led to shrinking plans for construction, as 74% of hospitals report they have put off capital expenditures where new capacity or renovations are concerned. The hard freeze of capital markets also makes it more difficult to come up with funding for new projects, as well as shrinking hospital portfolios.
To add insult to injury, as hospital incomes dropped, hospital patient volumes grew. AzHHA reports that emergency room visits have increased 6.4%, patient stays 2.1% and patient discharges 2.5%. An October 2008 hospital payment rate freeze by the state’s Arizona Health Care Cost Containment System has also taken a bite out of profits. Other substantial increases in costs come from uncompensated “charity” care, which has gone up 8.3%.
“Emergency medicine is more busy than a year ago,” Laney says. “Instead of going forward with elective procedures, they will wait, because the working family might not have insurance. They wait until things reach crisis mode and then go to the ER,” which are federally mandated to see all patients.
Medicine crosses many segments, Laney says, so different kinds of practices ha ve been affected differently by a slowing economy.
Robert Walker, DDS, is an orthodontist in Chandler who recently completed some minor office renovations. He says that while his revenues have dipped a bit, other orthodontists and dentists haven’t fared so well.
“I know doctors and orthodontists that have gone out of business,” Walker says. “They were businesses that have been around a long time. I’m glad I’ve only got one location to sustain focus on.”
STIMULUS EFFECTS
Those in the healthcare development business don’t see many “quick jolts” to the economy by federal stimulus efforts, but do hope there will be some long-term benefit.
“According to the experts I speak with, there most likely will not be an immediate impact by the federal stimulus on healthcare development,” says David Genovese, president of GPE Companies. “Obviously, as time goes on, as the credit markets free up, financing for hospitals and healthcare properties will be more readily available, which will allow some of the previously planned projects to be reevaluated and hopefully move forward. The most immediate impact from the stimulus package, as I understand it, will be to assist with some of the outstanding healthcare reimbursements that have not been paid.”
The federal stimulus will also bring HUD financing for certain, most likely rural, hospitals. Genovese says the stimulus may fund the downtown medical school as well, which was put on hold after the state budget eroded.
NO SLOWDOWN OF GOOD IDEAS
How to deal with a picky market? Builders and developers, Genovese says, should design buildings that are user-friendly, with flexible bay depths for a variety of square footages. “In this market, I would be sensitive to market conditions and keep my rate as competitive as possible and offer an aggressive tenant improvement package, combined with strong building amenities,” he explains.
Genovese says some developers are trying to provide “turn key” medical suites so tenants don’t have to come up with cash or get financing for their buildouts. Lease rates might be staying the same, but higher TI allowances are being negotiated — along with free rent in many situations.
Developers are also focusing on “synergistic” opportunities in healthcare. Aaron Kuhl, designated broker at Medical Office Brokers, says popular options are placing related offices adjacently so doctors can increase visibility and traffic. “When I research a space geographically and economically,” he says, “I’ll look at synergistic opportunities that add value.”
THE STRONG SURVIVE
Despite the economic slowdown, there remains an underlying optimism and increased creativity among those working in the healthcare development sector.
“Really, it’s the same thing that it’s always been: providing the best possible product for the best possible price,” says Peter Spier, vice president of development for the Plaza Companies.  “I think what you’re seeing is a flight to quality across the board.”
Arizona, Spier says, is a “great place to live, period. You start off with a great foundation. The population will continue to grow, and that population is going to need healthcare services.”
www.arizonamob.com
www.azhha.org
www.bannerhealth.com
www.ensembledevman.com
www.gpe1.com
www.southwesturgentcare.com
www.theplazaco.com
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