Spokane Journal of Business

Medical office upswing

Builders say health-care providers here appear to be more confident

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-—Staff photo by Treva Lind
The interior takes form at a small medical office under construction at 251 E. Fifth, south of Interstate 90. The project is one of about a dozen medical structures in the works.
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Spokane-based contractors say they've seen requests to build new medical and dental office spaces increase significantly in recent months, including about a dozen projects in the works and others entering the design phase.

Combined, the projects have a dollar value of at least $70 million.

One of the largest medical facility projects under way that's highly visible from Interstate 90 is for the Providence Medical Park-Spokane Valley complex, at 16528 E. Desmet Court. Providence has estimated the total value of that project, which is expected to be completed by spring of next year, at $54 million. Bouten Construction Inc., of Spokane, is the contractor.

Providence also has a $9.5 million, two-phase project at Holy Family Hospital for an expansion and remodel of the maternity center at its campus on Spokane's North Side.

However, a majority of current medical facility construction is for small-practice medical or dental offices throughout the Spokane area. The projects range in value from $500,000 to about $4 million and include both new construction and tenant remodels of existing structures.

Part of this shift, observers say, likely is tied to the current economic recovery, but a big part of it also is in response to medical industry changes, including a move toward providing more outpatient services. Some providers are seeking upgrades to do medical procedures at their practices.

Mike Silvey, president of Spokane Valley-based Silvey Construction Inc., says he's seen a noticeable increase in inquiries, as well as in contracts signed, for new medical facility projects in the past six months. He says in the three years prior, such activity was relatively slow.

"We've signed contracts for several substantial projects in the past few months, and the rate of inquires has increased significantly, so the economy seems to be better," Silvey says. "We've got three or four projects going right now."

He says he believes that many health-care project developers held back in recent years, in part because of the economy and because of turmoil in the industry. He says some medical providers waited out the economic downturn, when a number of patients also put off treatments.

"They just lacked confidence before, but they seem to be getting over that; they seem to be gaining confidence," he adds. "I'm not convinced it will last yet."

Barry Baker, president of Spokane-based Baker Construction & Development Inc., says he's noticed such medical office space projects taking shape, but that he expects even more health care-related construction next year as Affordable Care Act impacts take hold.

"The medical office market has some really interesting dynamics in Spokane," Baker says. "You have the two major hospital groups that bought a lot of the private practices out, so there are not a lot of independent groups out there. With Obamacare, some of these medical groups are waiting."

He adds, "I think there's going to be a huge demand in 2014, when something like 30 percent of the residents who don't have health insurance will be needing care. There's going to be a lot of need for medical office space."

In 2010, Baker Construction developed a 26,000-square-foot building located at 1334 N. Whitman Lane in Liberty Lake, which includes Spokane-based physicians' group Columbia Medical Associates leasing as an anchor tenant. Group Health Cooperative acquired that medical group in 2011.

Baker says that Liberty Lake project is an example of constructing a medical facility tailored to a main medical provider, and that tenant in turn can attract related medical offices. He says Columbia drew Inland Imaging, Pathology Associates Medical Laboratories LLC, and other tenants to the building, which now is nearly full and has 7,000 square feet of floor space vacant.

"We found the tenant (Columbia), and we built the facility around that, and they brought in other tenants because primary physicians need specialists," he says.

Baker Construction has submitted plans to the city of Spokane for another project planned by early September to convert the former Spokane Sons of Norway fraternal organization lodge at 6710 N. Country Homes Blvd. into a 20,000-square-foot pediatric therapy practice. Brad Fryett, co-owner of Center for Pediatric Therapy now located at 8502 N. Nevada, says the business is buying the building.

He says he and his wife, Echo Fryett, who is a physical therapist and co-owner of the practice, plan to have Baker Construction gut the building and remodel it as the practice's new location to provide physical, occupational, and speech therapy to patients from birth to age 18. With the move, the practice plans to add to its current 18 employees and to have up to 25 people working at the new facility, he says.

An application filed with the city estimates the tenant-improvement costs at $500,000, but Fryett says the costs will be significantly more. He declines to disclose the amount.

Meanwhile, one of Silvey Construction's current projects involves converting the two-story former Discovery School at 323 S. Grant into a new dermatology clinic, after a real estate investment group headed by Spokane dermatologist Dr. William Philip Werschler bought the 14,200-square-foot building last fall. Plans on file with the city estimate the cost of that project at $890,000.

Additionally, Silvey Construction is scheduled to develop an estimated $4 million, 38,600-square-foot building on the North Side this fall that Silvey says likely will be a medical professional space. The two-story structure is planned for a vacant site located along Nevada Street near a Chuck E. Cheese pizza restaurant.

Silvey Construction also recently has finished some tenant upgrades in portions of existing buildings that the company constructed in recent years, but those structures were only partially occupied by health-care practices.

"We just finished a 7,000-square-foot office for a group called The Emily Program as a tenant improvement in a building we built a few years ago," he says. The Spokane office of the Minnesota program recently opened the office, at 2020 E. 29th, on the South Hill and provides treatment for eating disorders.

Overall, Spokane's medical office space vacancy rate was at 10.4 percent in February, down from 11.1 percent a year earlier, says Gordon Hester, vice president of commercial real estate brokerage Kiemle & Hagood Co. He says that industry's vacancy rate steadily has improved in the past year.

Hester says one trend in this market is that the way medical services are offered today is much different than years ago, and those services include outpatient surgical procedures. At practices, some providers are doing more complicated procedures that they previously did in a hospital, he adds. As a result, construction of medical office space is often much more complicated and costly to manage and construct today, he says.

"Medical services are being delivered in a different manner to medical patients," Hester says. "The services are being provided closer to where the patient is, and they're trying to get closer to an outpatient model, as opposed to the patient coming into the hospital."

Hester adds, "The Providence Medical Park is a great example of the type of new construction we're seeing that's really trying to deliver that new model of care closer to the patient and more of the outpatient type of care."

Hester also says that some new construction activity of late is tied to hospitals buying practices, and then needing to improve their spaces. He says some contractors here are landing jobs by being nimble in handling requests from smaller health-care project owners.

Among other projects in the works, MMDC Properties LLC, a development division of Spokane Valley-based Meridian Construction Inc., plans to renovate a nearly 5,000-square-foot former Farmers Insurance claims facility, at 26 E. Fifth, into leasable medical space on Spokane's lower South Hill.

A different project is in the early planning stages at 505 E. 28th on the South Hill to develop a 3,750-square-foot, single-story medical office on a vacant lot.

Additionally, Stejer Development LLC, of Spokane, under a partnership with dentist Simon Prosser, is developing a two-tenant medical building that's nearly completed at 251 E. Fifth, near the main Rockwood Clinic building, southeast of downtown. Prosser's dental practice, Simon Prosser DDS PLLC, will occupy about half of the 4,700-square-foot building. The remaining space is available for lease. Kilgore Construction Inc., of Colbert, is the general contractor on that project.

Silvey says that while it appears that such medical projects are on the rise, he compares the construction activity level to a hospital patient whose condition has improved moderately.

"The market hasn't arrived at what I'd call robust yet," he says. "I'd take it out of intensive care and put it into something stable, but I don't think it's fully recovered yet."

Treva Lind
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