Hospitals as real estate powerhouse

The real estate needs of the city’s hospitals reflect a health care head-scratcher: These institutions want to treat more patients, but want only the sickest ones to show up at the hospital.

To accomplish this, many of the largest New York City health care systems aren’t just renovating their hospitals into state-of-the-art facilities, they are also enlarging their footprints by opening outpatient centers. And they’re becoming big real estate players in the process.

The growth thus far is evident. Last year, hospital and health care systems were the city’s fifth-largest group of recipients of loans valued at $100 million or more, according to an analysis of commercial mortgages by The Real Deal.

But hospitals, especially those in Manhattan, face challenges to expansion, including finding usable space and renovating existing commercial properties, as well as winning over reticent neighbors. Some unprofitable hospitals that have been forced to shutter are now being developed into a lucrative real estate projects. For example, on the site of St. Vincent’s Catholic Medical Center in Greenwich Village, Rudin Management is now developing a luxury residential complex. Other troubled facilities, such as Interfaith Medical Center in Bedford-Stuyvesant and Long Island College Hospital in Cobble Hill, face an uncertain future.

“Medical providers are taking a close look at how they can operate as cost effectively as possible,” said Paul Wexler, the leader of the Wexler Healthcare Properties Team at Corcoran Group Real Estate (see “Paul Wexler, real estate doctor”). “Health care providers are relocating into more convenient locations to be more accessible to businesses and residences.”

Three-pronged strategy

Hospitals need a three-pronged real estate expansion strategy to address today’s medical landscape, said Glenn Grube, program director of the health care spectrum at Faithful + Gould, a Manhattan-based construction project management consultancy, which completed a facility infrastructure assessment for NewYork–Presbyterian Hospital in 2010.

The first prong involves erecting new buildings or renovating existing hospitals. Mount Sinai Hospital is doing both at its Astoria, Queens, facility, with a $125 million renovation and expansion that includes a bigger 19,000-square-foot emergency department and upgrades to the existing hospital. The hospital is expanding onto an existing site that came with its acquisition of Astoria General Hospital more than a decade ago.

“The most sophisticated modern care actually requires larger rooms and bigger equipment, and more single rooms to reduce the spread of infection,” said Elise Wagner, a partner in the land use department of the law firm Kramer Levin Naftalis & Frankel. “Hospitals have to take old buildings and reconfigure them, or build new ones to accommodate those needs.”

For example, NYU Langone Medical Center on First Avenue in the 30s, is currently modernizing its flagship facility, Tisch Hospital, while also constructing a new 800,000-square-foot acute care facility that will link to Tisch, along with a 71,000-square-foot building that will generate its own electricity off-grid, also on the main campus.

In addition to building and renovating, hospitals are also developing major outpatient facilities near their campuses, so doctors can easily go back and forth, said Wagner.

For instance, Memorial Sloan-Kettering Cancer Center is planning a 1.5 million-square-foot medical complex that includes an outpatient cancer care center and medical school facilities for Hunter College at East 74th Street between York Avenue and the FDR Drive. Sloan-Kettering bought the former garage from the city in 2012 for $226 million. Designs for the complex, which is expected to be completed in 2018, were approved by the city in November, including a “bulk variance” for the 750,000-square-foot outpatient center and 450,000 square feet for the college facilities.

Meanwhile, NYU Langone is also creating a new ambulatory center at 240 East 38th Street near its main campus. The hospital bought 14 of the 24 floors, spanning about 327,000 square feet, in the building for $41.6 million in 2012 from New York University, according to Real Capital Analytics.

And in Brooklyn, New York Methodist is building a 365,000-square-foot ambulatory care facility on its existing campus in Park Slope, to deal with patient loads that have nearly doubled in the last decade. The eight-story building has raised community ire for being out of character with the surrounding brownstone Brooklyn area.

Other New York–based hospital systems are building outpatient centers away from their main facilities, sometimes in seemingly far-flung locales, to reach new patients, said Faithful + Gould’s Grube.

NewYork-Presbyterian is partnered with Columbia Medical Center to open ColumbiaDoctors urgent care centers across the city and in the suburbs. Last year, ColumbiaDoctors moved its Midtown location, leasing a 125,000-square-foot single-floor space at 51 West 51st Street from Vornado Realty Trust for 25 years.

Mount Sinai similarly opened urgent care centers on the Upper West Side and in Brooklyn Heights, away from its Upper East Side campus. The Upper West Side center on Columbus Avenue and 91st Street opened in May 2012, replacing a McDonald’s. In Brooklyn Heights, the hospital opened a 75,000-square-foot urgent care center at One Pierrepont Plaza in September. Cushman & Wakefield represented Mount Sinai in the 15-year lease, while CBRE Group represented landlord Forest City Ratner. The deal was announced in 2012, but the space, which was once a Goldman Sachs data center, underwent an $18 million renovation.

DVDs to EKGs

Expanding outpatient centers in New York City’s land-constrained market comes with challenges, most notably competing with other developers or tenants for leased space.

Corcoran’s Wexler noted that there is a lack of medical space available, partly due to developers’ desire to build residential properties to capitalize on the hot housing market. For example, the Chetrit Group is planning to convert the shuttered Cabrini Medical Center in Gramercy Park into 250 apartments. It bought the 400,000-square-foot property last year for $150 million from an affiliate of Memorial Sloan-Kettering, which purchased it in 2010 for $83.1 million, and originally planned to redevelop it as a cancer outpatient center.

Medical facilities are also competing for 5,000- to 15,000-square-foot floor spaces in the teens, 20s, and 30s and on the Upper West Side, said H. Guy Leibler, president of Bronx-based Simone Healthcare Development, which designs, builds and finances health care facilities.

Leibler noted that urgent care centers are popping up in storefronts where now-defunct retailers used to be, like Blockbuster Video or Borders Books. “We look at health care as a retail service rather than institutional care,” he said. “No one wants to wind their way through hospital corridors anymore.”

That’s also why specialized medical practices are moving out of hospitals and into smaller Class A office spaces, said Marisa Manley, president of Commercial Tenant Real Estate Representation and Healthcare Real Estate Advisors. For instance, in vitro fertilization clinics don’t need storefront space to advertise their services, so they can take cheaper office space without exterior signage, Manley said.

“They don’t need it,” Manley said. “It’s a destination for very specific patients.”

Hospital systems also are acquiring and hoarding potential development sites for future construction, especially in Manhattan, where land prices have soared recently. In 2011, Sloan-Kettering bought 327 East 64th Street from car rental company Hertz for $18.3 million, in a deal brokered by Cushman & Wakefield, according to RCA. Last summer, the hospital announced plans to construct a six-story, 90,000-square-foot medical lab for $169 million.

In another instance, RCA records show Mount Sinai in January bought 22-26 East 103rd Street for $11.3 million from Monaco Management. The lot is adjacent to the lot on 14-20 East 103rd Street that it bought in 2011 for $25 million. No plans have been announced for development.

In addition, Mount Sinai is also warehousing a number of properties it acquired through a merger with Continuum Health Partners last year, which increased the former’s New York City real estate portfolio to 17 million square feet, said Grube.

“They’ve got buildings that have sat empty for 30 to 40 years. It can’t afford to let them go or occupy them,” he said. “Because once they give up the land to monetize it, there’s no way they will ever be able to buy it back.”

Prepping for patients

The Affordable Care Act may soon encourage even more expansion, sources said. Simone’s Leibler said he expects the trend of expansion of ambulatory and urgent care centers to continue — and possibly fill any gaps that potential closings of other New York City hospitals leave behind, especially in the outer boroughs.

And Manley said several of her clients that serve lower-income populations are wondering if they should prepare to add more urgent care facilities, as more potential patients get access to health insurance.

“People are trying to read demand and position themselves,” she said.