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SD health care construction evolving; costs soar

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Medical-oriented development is continuing to evolve in San Diego County, as construction costs climb.

Ben Ryan, PMB Real Estate Services chief financial officer, said because of the specific requirements, it costs about $110 per-square foot to build out medical office space -- versus $40 to $50per square foot for a law firm.

Ryan and others participated in a presentation on health care facility costs, and medical office construction, sales and leasing at a Commercial Real Estate Women (CREW) meeting at the Sheraton La Jolla Hotel on Sept. 18.

"Costs are considerably higher than regular office and retail spaces," added Travis Ives, a principal in Cushman & Wakefield's Healthcare Practice Group.

Medical office costs are dwarfed by the dollars needed to develop a hospital -- that has soared higher than the $1,000-per-square-foot level since the recession ended.

"It costs $1,200 to $1,400 per square foot to build a hospital, said Thai Dinh, an associate principal with Mascari Warner Architects. "That works out to $2 million to $3 million per bed." Dinh added it is little wonder that hospital systems have increasingly relied on outpatient centers.

There are other advantages to the outpatient facilities and community clinics, which "are generally closer to where the patients are,” Ryan said.

Ryan noted that in recent years all the major health systems have pushed to move whatever service is practical into an outpatient setting, and grow their network of community clinics into the surrounding suburbs.

Kevin Pokrywa, Palomar Pomerado Health facilities planning director, said he expects this trend to continue.

"You look at places like San Marcos and 4S Ranch … These community clinics are going into a lot of different communities," Pokrywa said.

Ryan said medical office buildings with clinics of 7,000 to 10,000 square feet are a common size.

Recent hospital development, includes the 2012 completion of the $1 billion, 740,000-square-foot and 288-bed Palomar Medical Center in Escondido.

Kaiser Permanente broke ground earlier this year on its projected $900 million, 450-bed and 565,000-square-foot hospital in Kearny Mesa as a replacement for the facility on Zion Avenue in Allied Gardens.

The new hospital is being built to LEED Gold standards. The old hospital received an upgrade.

Pokrywa said his health system is now looking for ways to streamline its medical office holdings.

"We need to consolidate assets to be cost-effective," he said. "That means our external leases and determining if we can sell some of our buildings."

Ives said Palomar and other health systems would do well to regularly conduct a complete inventory of the buildings they own and lease.

As for new construction, Ryan said speculative medical office space has disappeared since the recession.

"We have seen 90 clinics developed here in the past five years, and not one of them was spec," Ryan said.

Ives agreed that while speculative construction may return, it would entail a large measure of risk on the part of the lenders.

Health systems, in the meantime, have worked to obtain office buildings that are close to or even on their main campuses, but owned separately.

The Tri-City Medical Center announced Sept. 24 it had taken possession, by eminent domain, of a 57,000-square-foot vacant medical office building on its Oceanside hospital campus not owned by the health system.

Dinh said the largest demand he is seeing in the medical field is for skilled nursing facilities.

Wendy Cohen, regional executive of the Kitchell general contracting firm, said the reason for such high demand is because the average skilled nursing facility in the state is more than 50 years old.

Whether it is Sharp Healthcare -- with so many buildings at its Kearny Mesa campus that there is barely room between them -- or Scripps Health or Kaiser Permanente, Ives said the great challenge is finding sufficient land for medical buildings.

For now, many health systems are upgrading existing spaces.

McCarthy Building Cos. has finished a $6.4 million design-build renovation of the Sharp Memorial Hospital Rehabilitation Center, an existing 14,172-square-foot, single-level facility located in the 2900 block of Health Center Drive in Kearny Mesa.

The renovation transformed the center's inpatient wing by adding more private rooms, updating administrative areas and hallways, and expanding outdoor therapy gardens.

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