Medical property market faces space glut: prospects for new health care projects look questionable.

Medical property market faces space glut

Medical buildings may seem attractive to developers who are looking for private construction projects in today's down market, but health property specialists warn that the niche is also overbuilt.

"Developers may now be saying, `Let's go into health buildings,' but it's not a good idea," said Robert Held, a partner at the Westwood-based Held Properties, a commercial real estate developer and property management company that erects both medical buildings and commercial office towers.

There are two reasons he does not recommend the health care building specialty to general developers, especially at this time, Held explained. Developers and construction companies need years of experience to know how to construct medical office buildings and clinics. In addition, there is currently little demand for medical properties in Los Angeles County.

To illustrate his first point, Held offered this scenario: If a developer places an office building next to a economically troubled hospital that goes bankrupt, he will end up stuck with a white elephant.

"Those guys are going to get hurt," Held said, because medical office facilities are too small to serve as a regular office building.

Medical office buildings, he said, are built to different specifications and have narrower hallways to accomodate several patient rooms. An office in a standard office building usually averages 12 by 14 feet, but patient offices averages 8 by 10 feet. In addition, medical offices require quite a bit more plumbing than do regular office buildings.

Held's company recently built three medical office buildings in a joint public/private $170 million venture for UCLA Medical Center, and is the property manager for one of the office buildings, which is privately owned.

However, Held said, even though his company has more than 40 years of medical construction experience, obtaining the UCLA contract still was not easy - 200 companies competed for it.

Not everyone in the medical construction field shares Held's wary attitude.

For instance, Deborah George, marketing director for West Los Angeles architecture firm The Nadel Partnership, said that many Southland hospitals are interested in building medical offices, outpatient clinics and nursing homes adjacent to their properties to generate additional income.

George said her company designed a eight-story, 200,000-square-foot combined office center and ambulatory outpatient care center that is being built next to St. Joseph Hospital in the City of Orange. Doctor's offices will take the top three stories, with the rest devoted to the outpatient clinic.

But Held said that few Los Angeles County hospitals are building projects such as the St. Joseph project and it has been 15 years since his company built an office building next to a major hospital.

Another health care building specialist concurred in Held's view: "What is happening now is that people are looking to jump on the health care bandwagon. This will just create a glut because medical buildings are also overbuilt. There is plenty of everything now."

The specialist added, "It would be a lot smarter for them to go to another community" to build medical office buildings.

For this reason, even medical project specialists have few new ones in the works. Beverly Hills-based G&L Development principals Daniel Gottlieb and Steve Lebowitz, who own six buildings in the luxurious `Golden Triangle" area of Beverly Hills, are skipping new projects for now.

Though Gottlieb and Lebowitz have bought, rehabilitated and developed 15 separate office buildings in Beverly Hills during their 14-year partnership, they are now content to perform property management services for the present six-building portfolio.

Principal David Gottlieb was quoted recently as saying, "This is not the time to be moving ahead aggressively in commercial real estate," when G&L recently completed its latest building, a $40 million, 74,000-square-foot medical office facility in the heart of Beverly Hills at 436 N. Bedford Drive. The building was 75 percent occupied shortly after it was completed.

Gottlieb also said, "Money is unavailable and there's a recession out there," even though he has leased out more than 95 percent of the 250,000 square feet of medical office space that G&L owns.

While prospects for new projects remain debatable, medical building developers say there may be opportunities in the public hospital sector for construction companies. Los Angeles County's ailing hospital network needs $2.3 billion of renovations and repair, but that overhaul cannot go forward without voter-approved bond financing.

The Board of Supervisors has not yet begun debate on the matter but it will have to work out the financing details before completing its proposed 1991-1992 fiscal budget in April.

Local construction companies that specialize in hospital projects, such as Los Angeles-based Swinterton & Walberg Builders, are following the deliberations closely.

"We are looking to bid on those projects, especially hospital building and medical office buildings in the $20 million to $60 million range," said Alice M. Wilson, the company's director of business development.

"Those are good projects," echoed another medical building developer, "but they are tricky because a lot goes into that," including the need to conform to federal, state and city government regulations and codes.

The long-term capital improvement plan drafted by the County Department of Health Services calls for the replacement of the Los Angeles County-USC Medical Center at a cost of $1.18 billion and the construction of a new hospital in the San Gabriel Valley.

But the renovations cannot proceed without bond financing. "Basically the whole package is predicated on general obligation bonds," said Gunnar Green, the county health department's chief of capital planning.

Unfortunately for the health department, under changes mandated by Proposition 13, increases in property taxes need a two-thirds majority for passage. And in the past election, voters approved bond measures only for items such as transportation proposals that have direct benefits for them.