Hospitals cut off building projects

The boom years of health care construction are grinding to a halt for many commercial builders who've long relied on the medical industry to keep bulldozers rolling.

Metro Detroit hospitals are stalling new construction projects because of a lack of financing, and the cutbacks have slowed business for local contractors in an industry already suffering from a 30 percent unemployment rate in Michigan.

For years, health care stood out as a bright spot in the state's flagging economy as one of the few growing sectors, providing steady work for construction firms seeing downturns in other parts of the market.

More than a half-billion dollars worth of hospital projects were in the works across Metro Detroit last summer, as these institutions sought to upgrade buildings, add new medical technologies and grow their footprints to meet market demands, including an aging baby boomer population. But many health care organizations have stopped work in the near-future until the economy rebounds and they can better gauge the direction of the market.

"Going into the year, the conventional wisdom is that health care construction would hold its own," said Damian Hill, director of industry relations for the Associated General Contractors of Michigan, a Lansing-based trade group. "It's a market that since 2000 has been growing in terms of spending, but it looks like 2009 is going to break the trend."

Beaumont Hospitals, for instance, has suspended several multi-million dollar projects, including three new outpatient centers, a new cancer therapy center on its Royal Oak campus and two new patient towers at its medical center in Troy.

The Detroit Medical Center has yet to start construction on a $30 million outpatient center for its Children's Hospital of Michigan because it's been unable to raise enough financing through the bond markets.

St. John Health in Warren finished construction on two major projects last year -- a new hospital in Novi and an addition to its medical center in Detroit -- but is holding off starting anything new until the economy improves and patient business stabilizes.

"There is much more risk in construction projects now, because the future demand for services is a bit more of a question mark now than it was in the past," said Bob Hoban, senior vice president of business strategy for St. John Health.
A national trend

Health care construction spending has been sliding nationally, too, largely due to the bond markets seizing up, making it harder and more costly for health systems to borrow money for expansions or renovations, said Ken Simonson, chief economist for Associated General Contractors of America in Arlington, Va.

Within the last year, spending on health care construction nationwide grew by only 2 percent to $48 billion, down from 9 percent between 2007 and 2008, according to the contractors association. Although hospital construction -- the biggest component of all health care spending -- remains strong, Simonson said he expects this sector to soon decline once work begun before the economic collapse is completed.
Smaller jobs, fewer workers

Locally, contractors already are seeing work taper off.

"Right now, everything is on hold," said Don Davis, vice president of the health care division for Southfield-based builder Barton Marlow. "The only things being done are the essentials."

Health care once comprised up to 30 percent of the firm's revenue "for any given year for the last 10 to 15 years," Davis said. Now, most work consists of small renovation projects for installing new equipment or mandatory upgrades required by building codes.

The lull has prompted the firm to cut staff for the first time in decades, although Davis declined to disclose how many workers have been let go.

For commercial builder George W. Auch Co. in Pontiac, work in health care also is slowing. And even if the economy recovers, it's unlikely the firm will once again see the lucrative $300 million to $400 million projects that were plentiful as hospitals replaced aging facilities, said Vincent DeLeonardis, the company's president.

"We're seeing jobs are smaller," DeLeonardis said. "Whereas in the past we may have had projects going at a dozen facilities, we're down to eight now."
Looking to the future

Despite the recent round of belt-tightening, builders expect health care construction to eventually pick up again.

New medical technologies, outdated facilities and changes in demographics will continue to necessitate new construction, although hospitals may proceed with more restraint than they did in the past, said Davis of Barton Marlow. They'll opt for the more barebones structures with lower price tags, he said.

"In the past, a client would want more signature architecture with a life expectancy of 50 years," Davis added. "Now, the idea is to be more functional."

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