Bucking the Recession: Healthcare Helps Keep San Antonio Humming

What recession? Sure, there are signs that the weak economy is affecting San
Antonio, as most business people in SA-Town will tell you.

For example, the construction of speculative general office buildings has slowed considerably, and probably will continue to be slow until demand catches up with supply, according to local commercial real estate brokers and developers.

But when it comes to the healthcare industry, and subsequently healthcare real estate, business is chugging along rather nicely, thank you.

In fact, according to a report in late 2008 from the local office of Grubb & Ellis Co. (NYSE: GBE), the amount of medical office space coming on line in 2009 was projected at about 690,000 square feet, more than the new supply of general office space – projected at about 570,000 square feet.

“Medical, I think is definitely one of San Antonio’s strongest sectors, along with the military, and while it has seen a slowdown, it’s doing very well,” says Paul Barker, a partner with
San Antonio-based Endura Advisory Group. “There’s such a strong medical presence in town and so many strong systems that it breeds a strong market. And residential, while it has slowed, is still strong and there are homes being built. The thing is, San Antonio is still a
great place to be long-term; job growth looks very good over the long haul.”

Bill Ozer, a VP with San Antoniobased NAI REOC Partners, adds that the town’s large Hispanic population, including many folks from Mexico with second homes in the Alamo City,
bolster the healthcare industry. “In addition to the strong, affluent population of Hispanic people who live here, it’s also quite common for people from Mexico to drive into San
Antonio for healthcare services,” he says. “The Hispanic population really helps drive our medical industry.”

A good example of the city’s bucking-the-recession performance can be found at the South Texas Medical Center, which had its start in northwest San Antonio in 1961 with the building of a medical school, the University of Texas Health Science Center.

Today, the 900-acre South Texas Medical Center is rife with about 45 medical-related institutions and numerous other support facilities, including retail space, administrative
office buildings, a post office, restaurants and other users.

And even though the area has experienced plenty of growth over the years, the medical center has never seen more healthcare development activity than right now – during a
recession, mind you.

Currently, projects under construction in the medical center are valued at just under $1 billion, according to the San Antonio Medical Foundation, a not-for-profit organization formed in the 1940s to lobby for the creation of a medical school in the city. The foundation still oversees land uses and developments in the medical center today, as it owns the land and typically signs users to long-term ground leases.

“I haven’t seen any negative impact of the economy on the medical center and its growth,” says Jim Reed, president of the medical foundation for the last 10 years or so. “In fact, the opposite is true. We haven’t heard of any projects being delayed or canceled because of the recession. I don’t think healthcare is totally exempt from what’s happening with the economy, but it’s not as affected as much as other sectors, and that seems to be true not only for the medical center, but for all of San Antonio.”

As Mr. Reed notes, medical growth is not only taking place in the South Texas Medical Center but in San Antonio’s other major healthcare concentrations as well.

Most people involved in the Alamo City’s healthcare real estate industry consider the town to have four medical areas, often referred to as healthcare centers. Those four areas are downtown San Antonio, the Stone Oak area of the North Central part of the city, the affluent Westover Hills area, and the aforementioned South Texas Medical Center.

Each of these healthcare concentrations has at least one up and running hospital – except Westover Hills, where San Antonio-based Christus Santa Rosa Health Care
plans to open a hospital this summer – as well as numerous medical office buildings (MOBs) and other healthcare facilities, such as surgery centers and clinics.

Oh yes, and lest anyone forget, the military has long had a huge presence and impact on San Antonio. And when it comes to the local healthcare industry, the military is going to have an even bigger presence in the future.

That’s because of the U.S. military’s base relocation and closure program (BRAC). San Antonio’s healthcare industry hit the jackpot with BRAC, as the military decided to consolidate all of its medical training facilities from throughout the country at Fort Sam
Houston, long the home of Brooke Army Medical Center (BAMC).

The future Medical Education and Training Campus (METC) is slated to have 1.2 million square feet of training and lab space and is expected to train as many as 45,000 students annually.

In addition, the military is in the midst of planning to consolidate two military inpatient hospitals in San Antonio – the BAMC and Wilford Hall Medical Center at Lackland Air Force Base – into one, expanded hospital. That project is taking place at BAMC which, when construction is complete in several years, is slated to be a 425-bed, 32-operating room hospital. The whole medical complex at Fort Sam Houston – the expanded hospital, the training facilities and a large outpatient center – is to be renamed the San Antonio Military Medical Center-North (SAMMC-North).

Over at Lackland AF Base, the Wilford Hall hospital is being converted into a massive, 645,000 square foot outpatient center that would include an ambulatory surgery center, eye care center, pharmacy, imaging center, and room for numerous other services. The project,
to be called SAMMC-South, is expected to cost about $441 million.

“The military has always had a big impact on the city, but it’s going to be even bigger in the future,” says Mr. Reed. “I was just at a presentation showing us all about these projects, and construction has started on many of them, which are fully funded by the government – possibly as much as $3 billion worth. And these projects spill over into the rest of the city’s
economy because there will be an additional 11,000 employees coming in soon, and there will be about 45,000 medical students trained each year. They’ll be coming in from the Air
Force, Army, Navy and Marines, and many of them will be moving here with their families.”

Mr. Reed adds that when medical professionals retire from the military, they often go to work at other institutions in town, such as the UT medical school. “It’s a great pool of resources because many of them retire early and are still in the prime of their careers.”

Center of medical
As noted earlier, the South Texas Medical Center is the major healthcare hub in San Antonio. In addition to the $1 billion or so worth of projects currently under construction, another $250 million in projects is already planned for the years between 2010 and 2015. Should the economy pick up, that figure could increase, according to Mr. Reed. “That additional $250 million or so is not yet in progress but planned for the next five years,” he says. “And those projects are typically understated by the institutions at first because no one wants to over estimate at this point in time.”

The growth of the medical center has been astounding, especially in the provision of outpatient services. Back in 1990, the medical center’s institutions and ancillary healthcare
providers saw 840,302 outpatient visitors. By 2008, that figure had reached nearly 4.9 million – an increase of about 83 percent. By comparison, the number of inpatient visits increased from 86,345 in 1990 to 103,605 in 2008, according to the San Antonio Medical Foundation.

Remarkably, the medical center has 350 acres or so remaining for development. And that doesn’t include land just outside of the medical center, where Mr. Reed says numerous MOBs and other medical facilities have been built, and are being built, especially along Huebner Road, which leads into the medical center.

The engine that makes the medical center motor along is the University of Texas Health Science Center at San Antonio (UTHSC-SA), which includes the schools of medicine, nursing, dentistry, biosciences, and others.

The UTHSC currently has about $265 million worth of construction taking place in two major projects. One is the building of a massive outpatient center, the Medical Arts and Research
Center (MARC), which is to be the new clinical and ambulatory care home for the med school. The 256,000 square foot, $106 million outpatient facility is slated for completion later
this year on a site near Bexar Countyowned University Hospital. The project includes the construction of an 860-space parking structure.

The other major project on the med school’s campus is the future $159 million South Texas Research Facility (STRF), which is slated for completion in 2010.

The biggest project in the med center, however, is a massive undertaking at the aforementioned University Hospital, which is spending about $778 million to build a new 488-bed trauma tower, expand its emergency center and construct a new parking structure with a capacity of 2,150 vehicles. As a result of the project, University Hospital would be expanded to 2 million square feet from about 1 million square feet, with the bed count growing to 721 from 498.

According to University Health System’s Web site, the hospital’s inpatient space is overcrowded, as is the emergency department. After the expansion, the ED is slated to have 65 patient bays.

Other projects planned for 2010-2015 in the medical center include $26 million worth of road work to improve traffic flow, $15 million in expansions and renovations at Methodist Hospital, $10 million worth of renovations at St. Luke’s Baptist Hospital, and a nearly $30 million remodeling and modernization project at the South Texas Veterans Hospital. Details of these projects were not available.

As noted earlier, brokers say there is plenty of privately funded development activity taking place just outside the medical center, especially along Huebner Road. It’s an area that
Mr. Ozer of NAI REOC Partners calls the “money corridor.” His firm is marketing an 8.5-acre, 50,000 square foot medical business park for developer Maresh Interests LLC.

“There are certain areas of town, for example those close to the four medical corridors, that continue to stay strong and one of those is along Huebner Road near the South Texas
Medical Center,” he says. “The onestory medical office buildings we’re marketing there are doing very well. I have to tame that with the fact that it’s still not the easiest thing to get
financing and dealing with the banks at this time. They require more money down and all that good stuff. But all in all, if you can overcome the bank bureaucracy and all of that, things are moving forward here in San Antonio.”

Other brokers in town say Huebner Road is also home to several smaller, single-user medical office projects. The newest MOB project in the medical center is on the campus of
Christus Santa Rosa Hospital, where two San Antonio firms, BP Healthcare Properties LP and GC Rowland Cos., are in the lease-up stage of the $12.2 million, 69,000 square foot Villa Rosa Medical Plaza.

Bob Wehrmeyer, senior director of healthcare development with BP Healthcare, says the first floor of the facility was pre-leased. Letters of intent have been signed for the second
floor as well as some of the space on the third floor.

Go west, young hospital
For a few decades now, professionals involved in healthcare real estate in San Antonio watched the growth of Westover Hills – a master-planned area in the western part of the city. Folks kept wondering when the area, which reportedly has more than 300,000 residents and is still growing – would get its first hospital and subsequently take off in terms of medical development.

Well, in recent years, all three of the city’s major private health systems acquired land in the area, causing speculation about who would get a hospital in the ground first.

The three systems are the independently owned and not-forprofit Christus Santa Rosa Health Care, which has four hospitals in greater San Antonio; Baptist Health
System, which has five SA-Town hospitals and earlier in the decade was acquired by for-profit Nashville, Tenn.-based Vanguard Health System Inc.; and Methodist Healthcare System, which has four general acute care hospitals in the metro area and is half owned by Nashville-based HCA Inc.

And the first in the ground? Christus Santa Rosa, which is gearing up for the opening of its new 150-bed hospital later this summer in Westover Hills. The campus already has a threestory, 60,549 square foot MOB that opened in early 2008. Dallas-based Trammell Crow Healthcare Services was the developer and is the owner of the MOB.

According to Paul Barker, a principal with the leasing firm for the MOB, San Antonio-based Endura Advisory Group, the MOB has had great success because of demand for medical
services in the area.

“The area had been growing for quite a while and it was inevitable that medical would take off in Westover Hills, which is in a great location about 15 or 20 minutes from the South
Texas Medical Center and about 15 or 20 minutes from downtown,” he says.

Until recently, the MOB was about 95 percent occupied, according to Mr. Barker. “But a tenant recently signed a letter of intent to fill the last space in the building,” he adds.

Baptist Health system actually had the first medical facility in Westover Hills, a three-story, 60,000 square foot MOB developed by San Antonio-based Atlee Development. The MOB sits on 40 acres Baptist owns just off of Texas Highway 151, on the other side of the highway from Christus Santa Rosa’s hospital. Baptist’s MOB, which opened in late 2006, is reportedly about 65 percent to 70 percent occupied.

When asked whether Westover Hills will see more medical growth in the near future, Mr. Baker said: “It will, but for now, because of the economy, there probably won’t be speculative medical office developments. And that probably holds true for all of San Antonio. If it’s not on-campus or is not a build-to-suit for a single-user, it’s not going to get built, at least for a while.”

But on-campus is a different story, and Mr. Barker says another MOB is being planned for the Christus Santa Rosa Westover Hills campus.

Again, it would be developed by Trammell Crow, which is part of CB Richard Ellis Group Inc. (NYSE: CBG), and be marketed by Endura.

“It’s pretty definite that it will break ground later this year and be larger than the first MOB, with about 80,000 square feet,” he says.

Stone Oak holds own
Besides the Texas Medical Center, the Stone Oak area of San Antonio is considered the next largest concentration of healthcare facilities outside of downtown. The area is home to a new hospital that just opened earlier this year, the 132-bed Methodist Stone Oak Hospital, as well as numerous MOBs and medical facilities.

The Stone Oak hospital campus includes Methodist Stone Oak Pavilion, a five-story 125,000 square foot MOB that was developed by Austin, Texas-based Healthcare Facilities Development Corp. Future phases of the Stone Oak campus could include the addition of another 220 or so beds, as well as another MOB of about 100,000 square feet.

Brokers estimate that there is about 700,000 square feet of medical office space in the Stone Oak area, located in the northern part of San Antonio.

One of the bigger, speculative projects taking place is the 18707 Hardy Oak Medical Pavilion, a $28.5 million, 120,000 square foot MOB being developed by Nashvillebased
Healthcare Realty Trust Inc. (NYSE: HR). The project is slated for completion later this year and brokers say pre-leasing activity is taking place.

The publicly traded REIT has quite a large presence in San Antonio, as it owns more than 450,000 square feet of space in SA-Town, not including the future MOB in Stone Oak.

In a report in a local business publication, officials with Healthcare Realty Trust say San Antonio continues to be a strong medical market and that the Stone Oak area is strong because many doctors and physician groups are looking to open satellite offices there.

Another project planned for the Stone Oak area is the 69-acre mixed-use Agora Palms, where San Antoniobased Dominion Advisory Group Inc., is looking to build several MOBs.
The Agora Palms development site is located adjacent to the Methodist Stone Oak campus.

While other areas of San Antonio have seen medical rents drop just a bit, Stone Oak continues to be a hotspot for medical. As a rest, rents have remained in the low $20s, triple net, according to brokers.

Big doings downtown
The downtown area is sometimes forgotten as a medical hub in San Antonio. However, the central business district is home to hospitals in the Christus Santa Rosa, Baptist and
Methodist systems.

In addition, the downtown has about 1 million square feet of medical office space, including the newly opened, 33,891 square foot Lexington Plaza. The facility was developed by a local
orthopedic surgeon who is taking 5,000 square feet. The remaining space is being marketed by locally owned Elaine Ludwig Real Estate Co.

The biggest outpatient project coming to downtown, however, is the massive expansion and renovation by Bexar County-owned University Health System. The system’s University
Health Center-Downtown, which was formerly Brady-Greene Community Hospital, will get a $120 million renovation and expansion that will result in 350,000 square foot outpatient center with an enlarged ExpressMed Clinic and Crisis Care Center, diagnostic imaging, clinical support functions, an expanded pharmacy, doctors’ offices, and other outpatient services. When all is said and done, the downtown outpatient center will have 45 percent more space than the current facilities.

“What University is doing at the South Texas Medical Center and downtown is a really a boon to the whole construction industry in San Antonio, in addition to what the military is
doing,” says Mr. Wehrmeyer, of BP Healthcare.

Other areas of San Antonio are also seeing an increase in healthcare, such as Brooks City-Base, a former Air Force base on the south side of the city that is being developed into a
technology and life sciences business park. There, Baptist has plans to build a $100 million replacement for its Southeast Baptist Hospital.

Also, Mr. Ozer of NAI RECO says the little town of Boerne, about a half hour north of San Antonio on U.S. Interstate 10, is a growing, affluent small town that could see some medical growth. Baptist opened a 69,000 square foot facility in early 2008 that includes a 24-hour
emergency room. The system has plans to eventually build a 50- to 100- bed hospital on the site.

There are also reports that a new hospital could be in the works for New Braunfels, located about 30 miles northeast of San Antonio.

The hospital, and some MOBs, would be part of a 400-acre mixed-use project there called New Braunfels Town Center at Creekside.

Christus Santa Rose acquired the 132-bed McKenna Memorial Hospital in the city and renamed it Christus Santa Rosa Hospital-New Braunfels in early 2008.

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