Developers, contractors and real estate investment trusts are joining forces, consolidating and expanding their operations to bolster business and cash in on a hospital building boom that shows no signs of subsiding.
Earlier this month, Lillibridge, a Chicago-based REIT that has focused for years on the ownership and management of existing buildings, purchased Mediplex Medical Building Corp., setting the stage for what officials expect to be a doubling of its development efforts. Other hospital construction deals have been forged in recent years as firms jockey for position in a lucrative market.
"I expected this to happen before now," said Robert Rosenthal, president of Pacific Medical Buildings, a developer of medical office buildings and parking structures that has 16 projects worth about $500 million in development. "Out here, we've had very little competition for many years. Suddenly there's a proliferation of national and regional companies."
A handful of noteworthy deals have taken place in the run-up to Lillibridge's acquisition of Plano, Texas-based Mediplex. Last year, investment firms Baird Capital Partners and Lubar & Co. paid an undisclosed sum to purchase Marshall Erdman & Associates, a design-build outfit with more than $200 million in completed construction projects in 2004. Also last year, CNL Retirement Properties, a REIT, acquired a 55% interest in Dasco Cos., which logged about $70 million in construction projects last year. Six months ago, Duke Realty Corp., a REIT with 2004 revenue of almost $1.2 billion, announced a 50-50 joint venture with Bremner & Wiley to develop healthcare facilities.
The trend toward consolidation isn't likely to lead to increased costs for clients, said Joseph Sprague, senior vice president and director of health facilities at HKS, one of the nation's largest healthcare-architectural firms. "This doesn't lessen competition -- it broadens services under one umbrella," Sprague said. "If you think about it, it could reduce the marketing costs under that umbrella and, hopefully, be passed along to the hospital" client.
Industry observers said it makes good sense for Lillibridge to expand its base business by moving aggressively into development, especially considering that its bread and butter -- the management or ownership of existing medical office buildings -- may have hit its peak a year or so ago.
"I think you may see more of this," said Fred Campobasso, president and chief executive officer of AMDC Corp., a developer, planner, financing and consulting firm with about $340 million in completed projects last year. "Lillibridge wanted more bench strength on the development side of the business. What we'll see, I think, is more consolidation from the standpoint of giving firms a development arm. It's a natural progression."
John Driscoll, president of the healthcare real estate services affiliate of Alter Care, which oversaw about $112 million in projects last year, called the Lillibridge deal an example of two complementary but quite different companies joining forces to expand their presence in the marketplace.
Lillibridge "has always wanted to be in development, but they probably just haven't been able to get over the first hurdle," Driscoll said. "So they acquired an existing company with their expertise."
The deal to acquire Mediplex served two key purposes for Lillibridge, which owns or manages more than 10 million square feet of properties and ramped up its development business from about $1.1 million in volume in 2003 to more than $20 million last year. It provides the private firm with a strong presence in a booming area of Texas, and it also adds a cadre of development experts to a well-funded REIT eager to expand into the high-stakes development area. Reed Construction Data, a worldwide provider of business information and the publisher of Construction Forecast Monthly, predicts overall healthcare construction will increase by about 10% to $36.6 billion in 2005.
Todd Lillibridge, the company's chairman and chief executive officer, estimated that the outpatient development business in healthcare, including medical office buildings, ambulatory-care centers and imaging sites, annually exceeds $2 billion in total spending.
While big-time developers are slicing up their shares of that profitable sector, there has been a recent downturn in the number of medical office buildings available for sale to healthcare real estate investment trusts, Lillibridge said.
It was time to boost the company's development side, which stood at about 20% to 25% of overall revenue last year but is expected to jump to 50% to 60% "down the road," Lillibridge said. "We've been in the development business for years. ... We saw back in the 2003 time frame that there was going to continue to be this shift to outpatient-related projects. Seeing that trend, we felt we needed to be out there in a bigger, broader way, with greater national capacity to meet our clients' needs."