Area developers expect medical expansion to spur business growth

A rendering of Essentia's exterior design.

Essentia Health officials call the system’s $800 million Vision Northland expansion project, which formally got underway in September, Duluth’s largest-ever private investment. Coupled with medical neighbor St. Luke’s nearly $250 million phased campus redevelopment, which has also started, a more than $1 billion investment in health care facilities will transform Duluth’s eastern edge of downtown and the hillside into what is envisioned to be a flourishing, robust medical district.

This giant construction endeavor – set to be completed by the end of 2022 for Essentia and over the next five to seven years for St. Luke’s – has several area business developers feeling bullish about how this expansion will spur other development.

“Investment begets investment,” said Nancy Norr, director of regional development for Minnesota Power, who also serves as a commissioner on the Duluth Economic Development Authority. “There will likely be new development as well as re-development, meaning there will be an upgrade and re-development of older, existing buildings in the area – a reinvestment in those structures as these new (health care facilities) are built. 

Health care is an important employment sector in this region, Norr said, and is “a prime driver of our local GDP… it is a fundamental building block to our regional economy when you take into account the ancillary and support services that it requires and that will be created through this expansion.”

The medical industry makes up 20 percent of the regional economic base in terms of employment, Norr said. In addition, she cited a January 2019 Economic Policy Institute finding that showed how health care has an employment multiplier of 2.0, meaning that for every job in health care, another full-time equivalent job is created outside of health care because of business and household spending.

With this pivotal role of health care in mind, local developers offered a long list of potential medical and non-medical businesses that might be generated by the planned expansions. 

From engineers to florists

Norr said a range of jobs, businesses and services will be a part of the medical expansion and subsequent related development. “From the engineering company that designs and creates a new emergency room bay to the florist who sells family members flowers to bring to their patients, you can expect that range of suppliers to be involved.”

Construction companies will be the first to benefit. For Essentia, there will be about 928,000 square feet of new construction – specifically a 12-story replacement hospital tower and surgery suites – and 120,000 square feet of renovations in existing spaces. At St. Luke’s, phase one construction started in April with work on a new emergency department, imaging services and parking ramp. Phase two and three involve doubling the size of the current St. Luke’s Building A and adding a hospital tower atop Building A.

Mark Hayward, senior vice president of operations for Essentia, said that over the life of Essentia’s three-year project, about 5,600 construction workers will be needed onsite. During peak times, about 600 construction workers will be there. And, over the life of the project, it is expected to provide work for 3,600 offsite, construction-related jobs.

“We’ll also be buying a lot of materials, and so we’re trying to source that locally too, to support the broader region that we serve,” said Hayward.

Kevin Nokels, St. Luke’s president and CEO, said his system too is trying to buy local, using “local trades, local vendors” where possible, but added that construction workers who come in from elsewhere will need services such as hotels and restaurants, adding another economic development component.

Indeed, the construction sector is already gearing up for this work, with some firms moving equipment and people into the area, said Greg Follmer, who heads Duluth-based Greg Follmer Commercial Real Estate. 

“We’ve done transactions based on this already, related to construction companies moving into warehouse space here to get prepared for these projects,” he said.

As construction progresses and is eventually completed, there likely will be medical-related businesses that emerge nearby, either in new buildings or re-developed older ones, several sources said. Potential businesses abound: Pharmacies, radiology services, dialysis services, specialty clinics, opticians, dentists, home medical equipment businesses, outsourced laundry services, outsourced food preparation services, medical information technology services, bio-medical companies, medical device manufacturers, independent physician clinics, assisted living centers, community-based health care services, and more.

“Whenever you have a large anchor, like a hospital facility with outpatient clinics, this will bring in other entities,” said Nokels. 

Brian Hanson, president and CEO of APEX, a privately funded economic development agency that serves the region, said the sky’s the limit, pointing out that even Google would be a good candidate for such a medical complex, given its recent announcement of a data-sharing partnership with the Mayo Clinic in Rochester. 

Several sources also mentioned potential educational links with the new medical facilities, given that area colleges and universities offer health care-related programs, such as UMD’s Medical School.

Finally, plenty of potential non-medical businesses could also surface: the aforementioned florists, child care services, general office buildings, specialty retail geared to health care such as uniform shops, general retail, hotels, motels, bars, restaurants, and real estate development, both rental and ownership units. That last item – real estate/housing – is emerging as a piece of the development puzzle yet to be solved. 

Housing developing

Adam Fulton, interim director of planning and construction services for the city of Duluth, said the city is working with the health systems in providing housing options for the systems’ employees, but also making sure there is affordable housing in the area. 

Right now, Fulton said 60 percent of the health systems’ local employee population live outside the city of Duluth, “and the medical campuses have expressed an interest in having employees live closer to where they work. So we are exploring options of new housing in these areas focused on multiple types of housing: apartments, townhouses, single family homes, rental and ownership.”

At the same time, Fulton said, “We want to make sure we maintain long-term affordability in the neighborhood.”

In a recent Duluth News Tribune article, local officials and housing advocates raised concerns about available affordable housing and the displacement of some residents because of the development. Essentia officials have said that the planned expansion will eventually open up more land for development and spur further housing creation, because construction plans call for new facilities to be built “up instead of out” and because of planned state-funded parking ramps.

For now, there is one major housing development in the works by Duluth-based real estate developer Titanium Partners. The Lakeview, a $75 million, 15-story apartment tower, will rise up on the corner of Superior Street and Fourth Avenue East. According to a Minnesota Public Radio report, this property takes advantage of the federal Opportunity Zone tax credit, which was included in the 2017 federal tax overhaul.

Development magnets that take time

Ultimately, these types of medical districts do serve as development magnets, sources said, but they do take time.

Examples? The most visible of course is the Destination Medical Center in Rochester, anchored by the Mayo Clinic.

Additionally, Nokels of St. Luke’s pointed to a similar development in Omaha, where he previously worked, which was built on undeveloped land that had been an alfalfa field and eventually included a hospital, medical office buildings and more.

Norr, of Minnesota Power, said LaCrosse has seen this type of development through the growth of Gundersen Health System and Mayo Clinic Health System-Franciscan Healthcare LaCrosse, entities that have made the medical industry the largest employer in the LaCrosse region.

On a smaller scale, APEX’s Hanson cited the hospital in Grand Rapids, which moved more than a decade ago from the center of town to an outer location on Golf Course Road. Development followed, including Lakewood Surgery Center, Majestic Pines Senior Living and the Grand Dental Center.

These types of developments, though, don’t happen overnight. “Whatever happens here will take years,” Hanson said. “Look at Rochester. They have been at it four or five years now and there’s still a lot more runway to go.”