Down Economy Creates Buyer’s Market for Some
Although much of the health-care sector has hit the doldrums during the recession, some major systems are seizing on the down market to move ahead with projects and reap big savings. Highly competitive pricing from contractors and favorable financing terms have provided added urgency for some facility planners looking to get the most for their money.
Douglas Erickson, deputy executive director of the American Society of Healthcare Engineering, says although the market remains soft, he is seeing more successful health-care systems ramp up activity. An ASHE survey of facility managers conducted in late 2009 showed that roughly a third of respondents said they had scaled back projects last year and another third stalled projects completely. However, Erickson says he sees signs of hope this year.
“I am seeing construction start to break loose,” he says. “Some things that have been on the shelf are now on the forefront and re-energized. The more successful [health-care systems] are looking at starting back up again on that road to recovery.”
Pricing is a major motivator. Erickson says he has seen some health-care systems buying projects at 30% to 35% below original estimates. “It’s such a buyer’s market. They can’t afford not to,” he says.
In some cases, the American Recovery and Reinvestment Act has created a sense of urgency. Work on a new $800-million University Hospital at the University of Texas Southwestern Medical Center in Dallas was accelerated this year to help take advantage of financing incentives provided under ARRA. The project was scheduled to go before the University of Texas System Board of Regents in spring 2011, but was bumped up to an August 2010 meeting so the project could take advantage of the Build America Bonds program in the federal stimulus plan. Under the BAB program, the federal government subsidizes 35% of interest payments. As an added bonus, interest rates this year have been historically low, says Philip Aldridge, vice chancellor for finance and business development at the University of Texas System.
“Timing was critical,” he says. “We really wanted to do the deal this fall to capture a low rate.”
Of the $800 million budgeted for the project, $434 million will be financed through municipal bonds. The project initially had been estimated at an interest rate of 4%, however UT secured a 3.02% rate. Aldridge says UT expects to pay $22.4 million in annual debt service, compared to the roughly $25 million it initially had estimated.
The balance of the budget is expected to come from $166 million in cash from UT Southwestern and $200 million in fund-raising efforts. Although the economy has made fund-raising challenging for many institutions, Aldridge says he expects donors to step up as the economy improves and the project progresses. Construction on the 1.3-million-sq-ft project is scheduled to start in spring 2011 with completion planned for 2014.
UT hopes that, by accelerating the schedule, it can take advantage of the hot bidding environment. “There is a sense that now is a good time for procuring a big project,” he says. “It gives us a lot more comfort that the $800-million cost will be sufficient throughout the life of the project.”
Similar efforts are under way at nearby Parkland Memorial Hospital in Dallas, where the $1.27-billion replacement hospital is moving ahead.
The project includes a 1.7-million-sq-ft, 862-bed hospital, a 380,000-sq-ft outpatient center, a 275,000-sq-ft office center, parking for 6,000 vehicles and a central utility plant.
Even as the recession began to take its toll on the financial markets in fall 2008, Parkland got a nod of confidence from voters, who passed a $747-million bond issue in November 2008 with popular support. As the hospital prepared to issue bonds, Congress passed ARRA, and Parkland was able to pursue the BAB program. The hospital system issued bonds at 3.71% and expects to realize savings of $120 million over the course of construction, in part thanks to savings from the bond program.
The project is under a construction manager-at-risk contract with a joint venture of Balfour Beatty’s Dallas office, Austin Commercial, H.J. Russell & Co. and Azteca Enterprises. Although some portions of the project have been contracted out, the team is working toward reaching a guaranteed maximum price on the main hospital by the end of the year. “All of the indications are that, from an owner’s standpoint, we will be hitting the market at the best time we could hope for on project of this size and scale,” says Walter Jones, senior vice president at the Parkland Health & Hospital System. “We expect to see a lot of competition for this project.”
Recent major hospital projects awarded with ARRA funding reflect the level of competition among contractors. In September, the U.S. Army Corps of Engineers awarded a $504-million design-build contract to a joint venture of London-based Balfour Beatty and St. Louis-based McCarthy Building for a 944,000-sq-ft replacement hospital project at Fort Hood, Texas. The contract award was well below the $621 million allocated for the project under ARRA.
Also this fall, the Naval Facilities Engineering Command Southwest awarded a design-build contract to a joint venture of Clark Construction and McCarthy for a new $394-million hospital at Marine Corps Base Camp Pendleton, Calif. The project received $563 million in ARRA funds. Of that, roughly $100 million was used for other contracts and expenses beyond the design-build contract, meaning the 500,000-sq-ft project came in roughly $70 million under estimates, according to Lisa Young, procurement contracting officer with NAVFAC Southwest.
