$15M medical building under construction at Penrose

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Construction is under way on a $15 million medical office building going up on the east side of the Penrose Hospital campus.

The 72,000-square-foot, four-story building will be developed and managed by Denver-based Westfield Development Co. Westfield is leasing the ground from Penrose Hospital, but will own the building and rent out the office space.

The building isn’t set to open until March of 2012, but two of the four floors are already leased. Palmer McAllister Principal Gary Hollenbeck, who is the broker for the new building, predicted the remaining space will fill up fast.

“We’re not even advertising yet and we’ve had quite a few inquiries from different medical practices,” he said. “We already have some letters of intent signed and we’re negotiating a contract for a tenant on the fourth floor.”

Colorado Springs Neurological Associates is leaving its current space at the Printers Park Medical Plaza on Union Boulevard to occupy the first floor of the new building. Penrose Hospital will lease the second floor, and plans to move its women’s diagnostics center to the new space.

All three of the main principals in the project benefited from coming together. CSNA was looking to expand to a larger, more centrally located space, Penrose hospital is leased-out with no room to expand, and Westfield identified the building as a solid, income-producing property.

Hollenbeck brought the parties together to finalize the deal.

“Health care dollars are being squeezed, so the big trend right now is to collaborate and cooperate with others in the field,” said Penrose Chief Operating Officer Jamie Smith. “We’ve partnered with physicians for a long time, but the last couple of years the conversation has turned to how we can all work together more efficiently. That’s what drove our desire to put another medical office building here.”

One way for a medical practice to work more efficiently is to locate on the same grounds as a hospital, and that’s one of the biggest draws for practices considering a potential move to the new Penrose facility.

“It sounds elementary, but time is money, and the transactional costs of getting to and from where you do your work are substantial,” Smith said. “CSNA uses our operating rooms quite a bit. They also use our radiation and oncology units, and all of our imaging modalities will be right here for them. It will be a short walk for their physicians from the office to the operating room.”

In addition to the proximity, Smith said medical professionals benefit from the sense of collegiality fostered at a campus-style workplace. But perhaps the most important feature is that the new building will serve as a true outpatient facility for the women’s diagnostics center.

The campus lacks this arrangement at the current facility, where outpatient flow is routed through the main hospital building.

“Our intention is to have mammography, ultrasounds, bone-density exams and biopsies centrally located for the convenience of women in the community,” Smith said. “There will be easy parking and easy in-and-out. Right now that’s all embedded in the hospital department, which is not well-suited for outpatient services.”

With the vision in tow, Penrose needed an experienced, financially stable developer and manager to partner with for the long haul.

“We like to spend our money on patient-care needs like medical equipment, beds and CT scanners,” Smith said. “Construction and building management, the bricks and mortar of it, that just isn’t our thing. That’s why we leased the ground to a third party.”

In Westfield, Penrose found a Colorado company whose reputation has been cemented in recent years with some high profile build-outs. Westfield recently finished construction on a 500,000-square-foot building in downtown Denver. It was the first major high-rise to go up in the central business district in 25 years.

“They’ve been here a long time and offered the greatest combination of management and expertise,” Smith said. “They’re open to allowing physicians to invest in the building, and they hold and manage — they don’t buy and flip. We didn’t want to be dealing with new management every few years.”

Westfield Executive Vice President Randy Schwartz confirmed the company’s intention to manage the building long-term, although likely not for the 99-year duration of the ground lease. Schwartz said medical office buildings have not historically been his company’s focus, but Westfield jumped at the chance to get involved in this market.

“The development industry is not very strong right now, but medical office buildings have done very well, and certainly those on hospital campuses have led the way,” he said. “We have a much stronger tenant base than if the building were off campus.”

The Penrose development is the second large real estate transaction involving medical offices this winter. In December, Hollenbeck represented Nashville-based Healthcare Realty Investment Trust in its $19.4 million purchase of the 85,000-square-foot NorthCare building at the St. Francis Medical Center. It was the largest transaction in El Paso County in 2010.

Still, Cascade Commercial Group owner Ted Link, who specializes in medical office space, warned against using big deals in the medical office industry as a barometer for the overall health of the construction or real estate markets.

“Medical is one of the healthiest markets we have, and it always seems to lead the pack in big deals,” he said. “But doctors don’t move that often because patients don’t like it. A lot of times when a tenant moves to a new property, the property they leave will sit vacant for a long time.”