Health Care and Economy and Real Estate & Retail

Builders relying on medical projects: Amid general slowdown, health care sector busy

May 26, 2008

There's no shortage of research pointing to the growth in the health care industry.

For example, health care expenditures will account for nearly a quarter of the gross domestic product by 2020. Consumers are increasing the number of times they visit the doctor, and the increase is even greater for baby boomers. The number of medical procedures being performed on an outpatient basis rises yearly. And jobs in the industry will grow 20 percent by 2016.

To meet those demands, hospitals, health care organizations and physician groups need more free-standing facilities and medical office buildings than ever before. That means developers that specialize in that market, like BremnerDuke Healthcare Real Estate and Lauth Property Group, both of Indianapolis, are busier than ever.

So while development of other types of commercial property is lagging these days as the economy continues its slump and the credit markets continue to tighten, health care development is going strong.

"The nice thing about the health care line is it's sort of inflation-proof because of the future expectations in development in this area," said James Bremner, president of BremnerDuke Healthcare Real Estate.

More research backs that up.

"The health care sector is less sensitive to fluctuations in the economy," according to a recent report issued by Grubb and Ellis Co., a California-based commercial real estate company. "Individuals will still require medical and health care services even during economic downturns."

The future includes a growing pool of baby boomers who visit the doctor more often than younger individuals, the report states.

People between the ages of 65 and 74 made an average of 6.5 visits to the doc- tor's office in 2005, compared with 3.3 visits for all age groups, the report found. Those over age 75 visited the doctor an average of 7.7 times a year.

But while baby boomers go to the doctor more, younger people are also visiting their doctor more often than young people did in the past, a sign more people today are getting involved in maintaining their health and in understanding their health care options.

On top of that, health care organizations choose to lease more of the buildings they occupy because they're rarely the sole tenants anymore. St. Vincent Health, for example, owns its traditional in-patient, acute care hospitals, but not its free-standing emergency and outpatient facilities or medical office buildings that many of its doctors occupy.

BremnerDuke Healthcare busy

So they need builders.

"That's the reason we're as busy as we are," Bremner said. "We're very fortunate."

While Duke Realty Corp., which acquired Bremner Healthcare Real Estate in 2007 and created BremnerDuke Healthcare Real Estate, reduced its outlook for new development starts this year to $750 million to $1 billion, nearly half of those starts will be for health care-related projects.

"We have turned down the volume in our speculative development and clearly we should," Bremner said.

Nationally, the health care properties market is valued at $700 billion to $750 billion, according to the Grubb and Ellis report. That's about half the size of the U.S. office market.

While the report did not carve out the value of the local health care market, it said there are 284 medical-related buildings in the Indianapolis metropolitan area for a total of nearly 8 million square feet.

Two of BremnerDuke's health care projects are in Fishers and in Duke's Boone County Anson project. Both are for St. Vincent.

The Fishers 120,000-square-foot medical center will include a free-standing emergency department. It's going up at the intersection of State Road 238 and Olio Road, which has seen massive residential and commercial growth in the recent past.

Following the tenant trend, St. Vincent will lease space in the facility.

"That is a result of a change in strategy and change in the market," said Kevin Speer, chief strategy officer at St. Vincent. "We believe very strongly that the day of the 800-bed hospital, like the one at 86th Street, [is] just not needed anymore. More and more services are delivered in an outpatient facility where there are also doctors and other services. We don't need to own that in order to deliver those services."

Leasing, instead of doling out huge outlays of capital to build, frees up funds for improvements to existing facilities and costs associated with expanding into areas of free-standing medical care facilities and office buildings, Speer said.

Strong sector for Lauth

Just as BremnerDuke is on a health care properties building spree, so is Lauth Property Group, another locally based developer with projects nationally, mostly in the southeastern part of the country.

Lauth, which also develops retail, office and industrial properties, ranks eighth on Modern Healthcare's 2008 Construction and Design Survey. BremnerDuke comes in at No. 14.

"Our health care group is probably our strongest sector at the moment," said Todd Jensen, Lauth's senior vice president of health care. Jensen was hired five years ago to build its health care segment.

Lauth plans to start 12 to 14 health care projects this year; 40 percent of the projects in its pipeline are in the health care sector. Last year, Lauth started eight medical projects.

Not only is the market seemingly recession-proof, but financing, while tight for other areas of construction and other industries in general, is still available for health care projects, Jensen said.

"Lenders are more comfortable with medical office buildings," Jensen said.

There is typically some pre-leasing activity or hospital-sponsor support, so it's less risky for lenders, Jensen said.

Lauth developed North Meridian Medical Pavilion, a two-building medical office complex spanning 180,000 square feet near Meridian and 121st streets.

The future of health care development looks bright for BremnerDuke and Lauth, according to the Grubb and Ellis report.

"The looming economic slowdown is likely to make the health care property sector, with its non-cyclical growth profile, look relatively more attractive compared to other property sectors, all of which will be affected to differing degrees by the flattening economy," the report predicts.

Lauth executives are counting on it.

"That's going to be a growing sector of our business, particularly over the next 12 to 24 months," Jensen said.
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