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Serious But Stable

Healthcare Sector Survives the Downturn But the Prognosis is Unclear

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The New York regional construction market’s dark journey since late 2008 has had its few bright spots – K-12 schools, higher education, massive ongoing transportation jobs – but few seemed as brilliant as healthcare. The vital signs were strong, with big projects churning along and expectations that the demographics of aging Baby Boomers and a growing population would keep the market humming.

One of the projects that kept the healthcare market active while the rest of the construction market sputtered was the 190,000-sq-ft New York Hospital Queens addition that opened in June. The $210 million facility, completed in just over three years, added 80 patient beds, a new ambulatory surgery center, a consolidated cardiovascular and orthopedic services center, and new medical and surgical units across seven floors.
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But beneath the veneer of vigor, multiple maladies have set upon the healthcare market, altering its short-term prospects and clouding its long-term outlook. And it all happened quickly, with economic pressures and the healthcare reform debate colliding, says Tom Gormley, vice president for healthcare services at URS Corporation.

“All of those things combined in a perfect storm to slow it down,” he says.

It certainly had a strong run while the rest of the New York-New Jersey-Connecticut construction market slammed to a halt, particularly residential and office projects. Big jobs advanced across the region, such as the $300 million modernization of Stony Brook University Medical Center on Long Island, a $210 million expansion at New York Hospital Queens, a $430 million clinical cancer center at Yale-New Haven Hospital in New Haven, Conn., and the $2 billion 657,110-sq-ft Virtua West Jersey Hospital in Voorhees, N.J.

Now, however, talk of new replacement hospitals, big additions, or major expansions has quieted down, says Jerry Guillorn, vice president at Structure Tone. “We’re not hearing of too many projects that hadn’t already been in the planning stage for a number of years,” he adds.

That’s atypical for a sector where design and planning and financing can take many years to come together, says Dick Anderson, president of the New York Building Congress. “The healthcare and university and cultural institution projects take a while to gear up,” he adds. “They often are part of large, multiyear capital programs.”

The sector still has activity, such as the ongoing work in Manhattan on the $300 million New Patient Pavilion at Harlem Hospital Center for the N.Y.C. Health and Hospitals Corp. and the $475 million Center for Science and Medicine being built on the Mount Sinai Medical Center campus. And many eyes are looking toward plans at New York University’s Langone Medical Center to start on its new 800,000-sq-ft Kimmel Pavilion and a major renovation of Tisch Hospital.

A few years ago, those would have competed for attention in a bigger scrum of megaprojects. Instead, the focus is on smaller bites. HHC, for instance, has no major modernizations in its pipeline for several years after a decade of nearly nonstop work, says Alfonso Pistone, its assistant v.p. for facility development.

“Right now we’re trying to remain cautious,” he says.

The smaller projects often involve infrastructure maintenance and upgrades, an approach prevalent in Connecticut, says John Butts, executive director of the state’s Associated General Contractors chapter.

“My sense is that a lot of hospitals aren’t doing much right now other than maintaining what they’ve got and maybe doing some renovations to their current facilities,” he adds. “They are holding back for the moment.”

A few of the market’s players see a brighter end game, however. Guillorn says while many projects are now on hold, some factors may influence a move ahead, such as facilities that obtained a “certificate of need” construction permit that may soon expire.

And more opportunity may stem from the need for healthcare providers to adjust to new regulations requiring higher-efficiency facilities and to the new federal healthcare reform act, which may add patients and alter health services business models. Smart firms are planning ahead for that potential revolution, says Bill Caretsky, senior v.p. and operations manager for the national healthcare division at Syska Hennessy Group, a mechanical-electrical-plumbing design engineer.

“That changes our philosophy in the short term from working on big, complicated, high-performance design projects to focusing more on small scale or modernization projects,” he says. “But we also have to prepare for where hospitals decide their programs need to be focused.”

Economic Malaise

When the world econ-omy stumbled, healthcare wasn’t immune. Despite a crop of big projects, even hospital administrators hit the brakes, in large part because of funding issues.

“Obviously a lot of the private hospitals use bond financing,” Gormley says. “I heard stories about bond rates that doubled overnight. That put a big damper on their financing capabilities.”

Certain projects simply stalled, says Mary Jane Van Horn, health sciences principal in New York City at Cannon Design, an architect based in the Buffalo market. “We saw a couple of projects go on hold because of the economy in the fall of ‘08,” she says.

It wasn’t just private hospitals feeling the pinch. As public coffers saw lower tax revenues and voters recoiled at new debt, agencies such as HHC also have come under pressure. HHC is facing a $1 billion budget gap in large part because of slashed state and federal funding, and it has implemented a “cost-containment” plan that includes a 30% cut to the five-year capital program budget, says Evelyn Hernandez, an agency spokeswoman.

“That unfortunately had to effect some of the funding on [our projects],” Pistone says. Among the changes is a reduced scope on the new Harlem pavilion, including postponement of a demolition project and on building a new garage.

 

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