Hospitals Go Back To The Drawing Board To Expand Postpandemic

The pandemic forced hospitals to reckon with the realization that their real estate portfolios were ill-equipped to meet patient needs. As a result, many quickly abandoned their strategic long-term plans to spend on the immediate crisis.

Now, almost five years since the onset of Covid-19, hospitals are turning back to their long-term plans, New York healthcare real estate executives said at Bisnow's New York Healthcare Real Estate conference last week.

This time, they are focused on the redevelopment of existing facilities and creating flexible space that can be modified to a different use at the drop of a hat. 

“We spent a lot of years dumping money into facilities from a cosmetic and space allocation perspective and ignoring what's behind the walls,” Northwell Health Vice President of Manhattan Development Jonathan Cogswell said onstage. “One of the key things that we have shifted is really taking into account the infrastructure with everything we look at and not just assuming that it's going to work.”

To provide care that their aging buildings could not accommodate, 76% of major teaching hospitals and 55% of nonteaching hospitals set up temporary spaces in 2020, according to a report by the Association of American Medical Colleges.

Healthcare leasing then surged in 2021 and 2022, exceeding 3M SF both years. However, as pressure subsided and medical tenants began to evaluate their portfolios, leasing dropped to 1.6M SF in 2023, according to CBRE data.

Weak points for healthcare systems were highlighted by the pandemic, but the need for investment didn't vanish with the creation of vaccines. Providers remain vigilant as an aging population is expected to drive demand.

Recently, investment activity for medical outpatient buildings has begun to increase as those plans are put into action, according to the CBRE report. In the second quarter of this year, market activity exceeded mid-2022 levels, with sales volume up 60% quarter-over-quarter and 38% year-over-year to $2.5B.

Further investment is expected as the cost of capital decreases, panelists said at the event, held at the medical office building Park Sixty.

“Projects have been suffering due to inflationary pressures and escalation that happened, along with what's come out of post-Covid,” HDR Health Principal Anthony Caputo said. “I think that's starting to clear. We see that the healthcare systems now are turning back to their strategic plans and looking forward to the future.”

He added that roughly half of all of the sector's spending in New York state is by eight healthcare systems based in the city. He expects that to increase as zoning becomes easier since the passing of City of Yes.

“The action is happening here. That's good news,” Caputo said.

New York Blood Center Enterprises Chief Real Estate Officer Vaughn Ratchford, who also sat on the panel with Caputo, has long attempted to expand his facilities.

In 2021, the Blood Center finally received approval to build a controversial 16-story tower on the Upper East Side. It was then hit with a lawsuit that further delayed the process before a judge allowed the development to move forward. 

In the meantime, the Blood Center is redeveloping Avon’s former headquarters in Rye, a northern suburb in Westchester County, as its new campus. The decision to do so was largely because of the inability to find swing space in the city, Ratchford said.

The Blood Center is vacating other spaces in the Tri-State Area, consolidating several operations under one roof at the new Rye center. That includes employees whose jobs range from office staff to laboratory researchers and hospital distributors.

“Making sure that you have the right infrastructure in place, making sure that you're building for the future and have some flexibility in your build-out, I think is really, really key for us,” Ratchford said. “When our research institute swings back to Manhattan, into our new building on the Upper East Side, that space is built in a way where it's easy to backfill with another use.”

Jenny Freeman, the managing director of buildings for project management firm Group PMX, said the struggle to find swing space is common and is something that has become more prominent in new developments.

“You have to really think through what's a good strategy for moving different pieces of programs around in advance and that kind of master planning,” Freeman said. 

In recent years, hospitals have begun building away from their main campuses, creating a web of facilities throughout the city. Executives said they expect that trend to continue, creating a more widespread and interconnected network of buildings that house both inpatient and outpatient programs.

Still, most main campuses continue to be headquarters for systems, serving large numbers of patients. But those buildings are often the least modernized within hospitals’ portfolios. 

That has created a problem that has yet to be solved, Cogswell said.

“The older buildings are in the middle, and the newer buildings get added on to the sides. The first building you want to tear down is the oldest building you have, and it's the last building you can tear down,” Cogswell said. “It becomes part of that master-planning challenge.”