The bigger impact of the recession may be in the dearth of big projects on the horizon, Caretsky says. “Five years before, in the previous cycle, you would finish one of these big jobs and there was another one right behind it,” he adds. “Now, the backlog of projects of that size has not been replaced.”
Meanwhile, desperate conditions in the rest of the construction market have only heightened competition for the few active healthcare jobs. “Everybody is hungry for work,” Gormley says, citing a recent RFQ in Michigan for the Detroit Medical Center that got more than 30 responses and now has a short list of eight firms. “Five years ago, eight would have been the long list and they would have taken it to three.”
Even as the economy sputtered, a second force buffeted the market – the federal healthcare reform debate that culminated in the new law enacted this year. As it went through the contentious legislative process, most healthcare organizations pulled back, unsure of the end result, Gormley says.
Even now, many are still “holding their breath” to see what the impact will be, says Cannon’s Van Horn. It could impact the need for inpatient beds and visitor volume on a main campus, particularly if the new law encourages more preventative care and steers patients to clinics and general practitioners.
The big hit from the reform debate has been a reluctance to add new patient beds, which were all the rage in the years leading up to the downturn, says Aine Brazil, managing principal at Thornton Tomasetti, a structural engineer. “We’re not seeing new bed towers in the master planning phase,” she adds. “They are a little concerned about committing to big bed expansions. But they’re not exactly sure what the impact is going to be yet, so there is a little bit of a hedging.”
There was an added layer of uncertainty in New York over the past few years because of recommendations from a state panel, known informally as the Berger Commission, to consolidate community hospitals. Only parts of the plan have been executed to date, says Steve Pressler, executive vice president and COO of the construction management division at STV.
But now that the new federal act is in place and other puzzle pieces are beginning to fit, there may be a thawing, Pressler adds. “They are starting to make capital planning decisions,” he says.
A big determinant for whether healthcare construction regains its footing lies in the financing picture.
“We were working with one of the large academic medical centers in New York and it stopped a 25,000-sq-ft lab and research project because it didn’t secure the funding,” Van Horn says. “At this point, if you get the funding you move forward, and if you can’t get it, you don’t.”
Many hospital managers are on the hunt for state and federal grants or aid, a typical underpinning for many projects, such as the New York Hospital Queens facility, which got primary funding and mortgage insurance backing from the federal Department of Housing and Urban Development. But such aid today is scarce.
Other traditional options, such as bond financing and philanthropic fundraising, are also pressured by the down economy. And it doesn’t help that many of today’s smaller-scope projects aren’t exciting donors, says Tom Telegades, managing principal for Cornerstone Program Advisors, an owner’s representative firm that recently combined forces with a similar outfit, Macro Consultants.
“It’s easier to get funding for very specific applications like a pediatric wing or a cancer treatment center or a heart center,” Telegades says. “It’s much more difficult to arrange funding for infrastructure.”
Still, hospital project planners are scouring for funds. Van Horn says she has clients moving ahead on several projects thanks to New York’s HEAL grants program.
Another idea is largely untapped in the region, but has worked elsewhere, says Ron Berger, executive director of the Subcontractors Trade Association. He says he encourages more use of third-party private investment vehicles that try to monetize the future revenues of healthcare facilities into current-day cash flow that can be used to fund projects or bond financing. “They’re doing it all over the country and the world but not here,” he says.
He says research facilities could especially be candidates for such financing because venture capitalists might desire the potential revenue from fields such as biometrics and stem cell research.
And targeted fundraising still has its place, says Thornton’s Brazil. “Yes, endowments are reduced, but for a lot of the major hospitals, their funds may come from one major donor who had a positive experience,” she adds.
Indeed, NYU’s Tisch Hospital renovation relies largely on a $110 million gift from the Tisch family, while the Kimmel project is anchored on a $150 million lead donation from Helen Kimmel.
Other signs of life are in the federal Veterans Administration, which for years was “sorely lacking in capital” but “now has got tons of money,” Gormley says. “We’re making proposals right and left on new treatment areas, emergency rooms, MRIs, CT equipment. Some of it is infrastructure work – chillers, air handling units.” His firm recently won a VA project in Albany, N.Y., and bid on another in Manhattan.
A New Prognosis
As tighter funding, recession pressure, and the new healthcare law have brewed, the healthcare sector has settled into a new atmosphere. Firms have to embrace short-term and long-term adjustments, Syska’s Caretsky says.
The new short-term menu has more renovation, infrastructure modernization, and life safety system upgrade projects, many of which may also lay groundwork for a future round of larger capital improvements, he says. HHC is among the organizations commissioning smaller projects while big pockets of capital money remain scarce.