Maple Grove Hospital Decision and Growth of Physician Ownership Drive
Medical Office Market

• Fairview Health Services and North Memorial Medical Center propose joint venture to build much-anticipated hospital in Maple Grove
• Physicians beginning to evaluate real estate ownership interests as part of their operational and occupancy plans
• Continued mergers and consolidations of physician groups mean changes in building design to accommodate these larger users
• More physician groups are performing procedures historically performed in hospitals as a way to generate new sources of revenue; therefore, hospitals are evaluating partnerships with these groups in an effort to protect their revenues.

Maple Grove Hospital Decision Drives Future Development
Fairview Health Services and North Memorial Medical Center formed a strategic alliance to better position themselves to be the group selected to build a hospital in fast-growing Maple Grove. They propose building on North Memorial’s site near I-94 and the future Highway 610.

Legislation passed by the House in 2005 awards approval to build the hospital to North Memorial. House leaders say the North Memorial-Fairview joint venture further reinforces their support for that proposal. The Senate’s version directs the decision to the Minnesota Department of Health. Legislation is necessary due to a state moratorium on new hospital development.

In an effort to plant its flag in Maple Grove, North Memorial recently broke ground on a first-phase, ambulatory/surgery center on its site, with hopes that it will be the beginning of a large hospital campus. The healthcare provider is partnering with Ryan Companies US Inc., which is planning retail and office development around the campus in a project called The Grove.

The third player competing for the hospital is Maple Grove Tri-Care, a joint bid by Park Nicollet Health System, Children’s Hospitals and Clinics and Allina Hospitals and Clinics, which controls land on the south side of Highway 610. Many agree partnering is the best political strategy to be selected for this highly sought-after, prestigious project. The hospital has high financial stakes due to outstanding submarket demographics, and it will drive future retail and office development. If Fairview-North’s site is chosen, most healthcare development would occur on the northeast side of I-694/494.

Physicians Look to Own Real Estate as Alternative Source of Revenue
Development of off-campus medical office buildings continues. Target markets include Lakeville, Woodbury, Maplewood, Blaine, Oakdale and Maple Grove. One related trend that has emerged is certain developers offering ownership interest in these buildings to individual doctors or physician groups. Examples are Radio Drive Professional Building in Woodbury and Tessar Professional Building in Oakdale. Offering interest is one way for developers to secure anchor tenants and for physicians to better control their own destinies and provide stability in tenancy. Doctors are considering buying into real estate in an effort to help offset the loss of revenue due to Medicare and Medicaid changes, lower reimbursements and higher malpractice insurance rates.

Mergers Mean Changes in Building Design
One way physician groups can generate additional revenue is by becoming more efficient, so the healthcare market continues to see mergers and consolidations in which groups can share business support and administrative services. This, however, changes the design of medical office buildings because larger floor plates are necessary to accommodate these larger users. The challenge for developers is to functionally accommodate these large groups while at the same time being able to accommodate a small, 1,200-sq-.ft. satellite clinic.

Partnering of Hospitals and Physician Groups Continues
The healthcare market continues to see physician groups search for ways to generate new revenue. One way is by taking more and more procedures that traditionally were performed in hospitals—like imaging and surgery—and performing them off-campus. In an effort to protect this revenue, many hospitals are partnering with these physician groups.

Outlook
A highly anticipated decision regarding the Maple Grove hospital could be made during the 2006 Legislature. Predictions shift on a weekly basis; however, as of this publication speculation is that the North Memorial-Fairview alliance is favored to prevail.

Because of the rapid expansion that has occurred in the Twin Cities’ off-campus market, we may begin to see a slowdown in the development of suburban medical office buildings. Two factors contribute to the slowdown: first, the expansion that has already occurred has not yet matured. The second factor is physician recruitment issues—drawing physicians to the Twin Cities market when competing with a wealth of job opportunities nationwide.

The next 12 to 18 months will be a transition period for doctors, especially those that are independent, due to the uncertain healthcare environment. Certain organizations want physicians to align themselves with one healthcare system, which is causing some independent groups to reevaluate how they will expand. It could mean future reorganization in how clinics operate.