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Office Developers Learn to Cope

Since the tech bubble burst in 2001, Corporate America has downsized and right-sized and generally dragged down demand for office space, leaving developers with no choice but to seek new niches of opportunity. The solution: develop healthcare and educational facilities.

In a recent poll of 200 senior healthcare executives conducted by general builder Turner Construction Co., 69% of the executives surveyed reported that their institution would likely undertake a major expansion in the next three years.

“Clearly, the construction of healthcare facilities is booming and shows no signs of slowing down,” says Robert Levine, vice president of healthcare for Turner.

For the first time since 1975 there has been an increase in the number of general acute-care beds across the nation, Levine says. “Obsolete facilities, combined with a lack of capacity due to a growing population of baby boomers, have created huge demand for new and enhanced buildings.”

Some Reinvention Required

Developers such as Hines, Trammell Crow, Carter and Opus have taken advantage of the increase in demand for both healthcare and educational facilities. It's helped them make money and retain workers during the extended downturn in the nation's office and industrial markets.

“We're focused on it more now than in the past, simply because it's a source of revenue,” confirms Chuck Moody, director of national business development at Tampa, Fla.-based Opus South. “The spec office market is basically non-existent, so we've stepped up fee development.”

What are the rewards? Fees generated by institutional development are generally similar to fees earned in a fee-only corporate project — generally between 2.5% and 3.5%, depending on the size and complexity of the project, says Trent Germano, executive vice president at Atlanta-based Carter.

“The amount of profit earned depends on how well the project is managed. In addition, the opportunity often exists to turnkey the project and the fees are more aligned with the risks involved.”

Dallas-based Trammell Crow Co. counts higher education and health care facilities/hospitals as two of its five core development areas. The others are institutional, corporate and municipal/government. “We've been building medical facilities and on campus for years,” says Trammell Crow partner Pat Henry.

Higher education and medical projects help Trammell Crow round out its development offerings, Henry emphasizes. “We don't just have to build Proscenium office towers every two years to stay alive,” he says of the 527,500 sq. ft. complex Trammell Crow completed in 2001 in Midtown Atlanta.

“Higher ed and medical development are a little less cyclical in nature. It does allow us to keep staffs big without having to go through the dramatic downsizing and reloading every time the market shifts,” Henry says.

Trammell Crow is one of several developers with a firm footing in the healthcare sector. Cousins Properties, a diversified real estate investment trust (REIT), has developed several medical office buildings, including a 358,000 sq. ft. tower on the campus of Emory Crawford Long Hospital on Peachtree Street in Atlanta. Cousins' medical office portfolio contains six buildings totaling 939,000 sq. ft.

There are also specialists in the healthcare development arena making their mark. Lillibridge Healthcare Real Estate Trust of Chicago started construction on a four-story, 70,000 sq. ft. medical office building in October on the 80-acre campus of the Good Samaritan Medical Center in Lafayette, Colo. The $11 million facility, which will be connected to the new 477,000 sq. ft. Exempla Good Samaritan Medical Center, is scheduled to be completed in September 2004.

Cindy Hughes, director of leasing at Lillibridge, says that interest in the medical office building “has been exceptional.” She is working with Health Connect Properties of Denver to lease the building.

In Pursuit of Education

Carter, a development firm founded in 1958, began working in the educational arena in 1993, when the Georgia Board of Regents hired the firm to manage the state university system's $100 million “Rebound” project that involved major projects on eight campuses. Since then, Carter has completed 5 million sq. ft. of educational space in 50 projects on 30 college campuses, says Germano.

“Generally speaking, the risks of educational projects involve both normal project risks as well as the added challenge of managing the various constituencies on campus,” says Germano.

“It is very important to manage expectations during the entire process, and failure to do so can result in a troubled project,” Germano continues. “This will impact the relationship between the developer and the institution and can also impact the bottom line.”

Carter has devoted its educational real estate services group to pursuing and undertaking development projects on private school, high school and college campuses. The group has eight to 10 employees. “This is something we can really do because it really matches our expertise,” Germano says. “It's very important to us. It's a good book of business.”

Some of Carter's notable educational projects are the $115 million construction and renovation project for Agnes Scott College in Decatur, outside Atlanta. The project involved developing a new science building, tennis center, dining hall and parking deck.

Carter also has completed projects for Georgia College and State University, Georgia Tech, Kennesaw State University and the University of South Florida in Tampa. The firm recently was selected by the University of Georgia Real Estate Foundation to renovate three dormitories and develop three new dorms at the campus in Athens, Ga.

In November, Carter completed a new $45 million administrative building and headquarters for Atlanta Public Schools, the system that oversees the city's public school system. Carter was the “at-risk” fee developer and guaranteed delivery and price, Germano says.

The firm handled the project's design, development, construction and budget. Carter also is overseeing the system's move into the new building near Atlanta City Hall. “It's been a complete turn-key package,” Germano says.

In addition to fee development, Carter also gets involved in educational development in which it retains ownership stakes.

A Higher Level of Understanding

Because campuses serve as the center of many college towns, on-campus projects must fit in with surrounding communities, says Henry of Trammell Crow, and that takes careful planning.

“It's a different mode of development than building a spec building or 150 branches for Bank of America,” he says. “The needs are different, and the stakeholders are different.”

Trammell Crow officially created its higher education development discipline about five years ago. The firm has developed and helped plan buildings on 44 college campuses, including the University of Washington, Rice University, Georgetown University and the University of Pennsylvania.

On-campus development typically falls into two categories: student housing and research facilities, says Henry. As colleges try to group on-campus students together in certain parts of campus, they are asking developers to help them plan new dorms.

“There's not a major or minor school in the country that either does not have construction under way or plans for student housing,” Henry says.

Trammell Crow typically develops student housing on a fee basis. However, the firm does have equity in some of the projects. Trammell Crow has created a separate corporation to help university foundations, which often own the student housing Trammell Crow develops, to help finance on-campus projects. The group often helps the schools secure tax-exempt financing as well.

A Race to Build Research Parks

In order to attract top graduate students and professors and provide a way to augment professors' educational experience, major universities such as Georgia Tech, Rice and Duke University already have or are in the process of building research parks, Henry says.

He points to North Carolina State University's Centennial Campus in Raleigh as the prototypical university research park. The campus is home to more than 100 large and small companies, university divisions and government agencies.

The “technopolis” on 1,334 acres adjacent to N.C. State's main campus is one of the fastest-growing developments in the Research Triangle Area. The campus contains business incubators, a conference center and hotel and town center.

For its part, Carter broke ground in January on two buildings at a research park at the University of South Florida. The company will have equity in the project and will lease and manage space in the buildings, Germano says. “It's more of a developer-type deal.”

The dramatic increase in demand for student housing and research parks has prompted competitors to try to get into the business, but it's not easy if they have no experience, Henry says. “You can't take an industrial development group and flop them over and start pursuing student housing,” he says.

Moving forward, higher educational development should grow in importance at Trammell Crow, Henry says. “It's one of our most strategic business pursuits. We're spending a lot of money and resources developing expertise to ensure our ability to perform in the higher education area.”

Stadium Project Hits Home Run

Real estate firms are doing more than helping universities develop new dormitories and research parks. Houston-based Hines has developed a baseball stadium and athletic administration building for San Diego State University in California.

The firm's initial assignment for the school was to serve as development manager for a 3,000-seat stadium that would serve as home to the San Diego State Aztecs baseball team.

Hines broke ground on the new stadium in August 1996, and the $4 million stadium, named for former SDSU and San Diego Padres star Tony Gwynn, was ready in time for the Aztecs' 1997 season. Baseball America magazine has ranked Tony Gwynn Stadium as the fifth-best collegiate facility in the country.

Hines' successful completion of Tony Gwynn Stadium resulted in more fee-based assignments from SDSU, says Rick Vogle, a vice president in Hines' Western region. The development firm has worked on the university's new athletic administration building and is leading the effort to develop a master plan for land use on the western portion of the school's campus.

Hines is charged with helping plot future growth and enhancing accessibility on SDSU's west side, Vogle says. “Like any relationship, our relationship [with SDSU] is very important,” he says. “Most of our company's work evolves from previous relationships.”

What's Next?

Though there have been signs recently that the economy is starting to improve, the national office vacancy rate is approximately 16%. The lingering real estate recession ensures that companies which depend on new development to survive will continue to seek out work on educational and medical campuses.

“It's led us into a lot of different directions,” Carter's Germano says of education and medical development assignments. “It's become a good source of revenue for us and supplements other areas.”

Tony Wilbert is an Atlanta-based writer.

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