By John B. Mugford
As far as Mark A. Davis is concerned, acquiring vacant parcels on speculation is not his preferred strategy.
“It doesn’t usually make sense financially to hold onto land like that,” says Mr. Davis, the founder and a principal with the long-time, Minneapolis-based healthcare real estate (HRE) firm bearing his name.
However, the HRE firm, which has developed about 40 projects in its history, has built many long-term relationships with healthcare provider clients throughout the Greater Twin Cities area of Minneapolis and St. Paul, Minn. So the Davis team knew, through ongoing discussions with these clients, that plenty of additional medical outpatient building (MOB) space was needed in the growing suburb of Lakeville, Minn., about 25 miles south of downtown Minneapolis.
According to the U.S. Census Bureau, the Lakeville’s population has increased 74.8 percent since the year 2000 and now stands at an estimated 76,243.
So, heeding the calls for more MOB space in the growing suburb, Davis gained control of a 4.3-acre parcel at 18645 Orchard Trail in Lakeville in 2019. The site is in a commercial area rife with well-known retailers such as Target, and is just off busy U.S. Interstate 35, which connects to both downtown Minneapolis and St. Paul, the state’s capital.
The original plans called for an MOB of about 50,000 square feet, and Davis heard from a wide variety of providers interested in the space. As the firm’s leasing team, which includes and is led by Principal Jill K. Rasmussen, spoke with potential tenants, one of them, MNGI Digestive Health, which had 10 other locations at the time, identified Lakeville as a market expansion target and selected the Davis site as the best option.
As Davis worked to line up tenants, develop its plans for the project and obtain city approval, the COVID-19 pandemic caused a delay for almost all business endeavors, including the Lakeville project.
At a certain point in the process – as the pandemic shutdowns were easing – and with MNGI committed to leasing just less than about 50 percent of the space, Davis pulled the trigger on acquiring the land and moved forward with its plans.
“Typically, we only start projects when we’re at, or at least close to, having 50 percent of them pre-leased,” Mr. Davis tells HREI™. “So, we decided to move forward, as we were quite confident, as a result of our talks with other prospective tenants, that we could fill the remaining space.”
Then, however, one of the Twin Cities’ larger health systems, Minneapolis-based Allina Health, which operates 12 hospitals and nearly 100 clinics in Minnesota and western Wisconsin, made it known that it, too, was in search of a place to offer a wide variety of specialty services and surgeries in growing Lakeville as well. The system already offered primary care and other services in a 12,500 square foot facility a few miles to the south of the Davis site.
So, Allina put out a request for proposals (RFP) for development options in Lakeville and eventually chose Davis and its planned project for a new location to offer specialty services.
After receiving a commitment from Allina, Davis began working with the health system on its space needs in the future MOB.
“We’d already received the approval for a 50,000 square foot MOB,” Mr. Davis recalls. “But as we worked with Allina, it became clear we were going to have to build a larger facility – a much larger building, in fact, as their space needs were quite large.”
Digging in
So, the firm dug in and started planning to add quite a bit more space – effectively doubling the size of the originally planned MOB.
This process entailed working with the city as well as the neighboring commercial ventures to allow a building that would have more than 100,000 square feet of space.
In addition to increasing the building size, the project now needed more parking – quite a bit more. To accommodate the increased number of spaces needed – which ended up doubling to 450 – Davis would need to add a parking structure of some kind instead of just relying on surface parking.
Because Allina’s requirements for the project did not allow an above-ground parking structure, Davis decided to go underground, adding one subterranean level below a surface parking lot.
“This required Davis to engineer a below-surface parking field at a net cost of $6 million to accommodate the parking requirements,” the firm wrote in its submission of the project for the 2023 HREI Insights Awards in the category of MOBs with more than 100,000 square feet of space. The project was one of five finalists in the category.
After the decision was made to increase the size of the project from 50,000 square feet to 100,500 square feet, Davis needed to move things along rather quickly while re-designing and re-engineering the project. The change of plans also meant that the construction team would need to excavate a large portion of the site in order to accommodate the new plans for below-ground parking.
To top it all off, one of the tenants, MNGI, which Mr. Davis calls a highly successful, independent and growing gastroenterology physicians group, could not experience a construction delay of more than four months, as it needed the new Lakeville location to “absorb capacity from a site it intended to vacate,” according to Davis.
As the firm wrote in its HREI Insights Awards submission, “Davis was able to secure the requisite approvals, design and construct the building and secure a switch gear that threatened to delay the grand opening within this revised schedule.”
Experience pays off
When asked how the firm and the development team were able to make such big changes and get the project done on time, Mr. Davis responded: “We have a great team, a creative and hard-working team, not only at Davis but in our longtime partners of (Minneapolis-based) Synergy (Architecture Studio), (Plymouth, Minn.-based) Timco Construction, and others.
“And, we had done something similar with our Hazelwood Medical Center MOB a few years ago, so we had experience expanding a project during the planning and development stages,” Mr. Davis notes. “The longer that you’re involved in this business, the more challenges you’re going to have to face and overcome. You learn from those experiences, and our experience in expanding our Hazelwood project helped us out on this project as well.”
In that project, Davis had started the initial development of an 82,000 square foot MOB on a 9-acre site next to the campus of the 184-bed HealthEast St. John’s Hospital in Maplewood, Minn., a suburb of St. Paul. However, as tenant demand for space in the area and in the project itself kept growing, Davis expanded the square footage – twice, in fact – and ended up opening the 148,000 square foot facility, which includes a 23,000 square foot surgery center, in 2017.
As for the Lakeville Specialty Center, Mr. Davis notes that the firm, after determining that the square footage needed to be expanded, was “intentional in our effort to gain the support of the Lakeville community. The entire development was thoughtfully outlined to sustainably boost the local economy while preserving the city’s picturesque atmosphere.”
The facility officially opened in spring 2024. It includes a 23,000 square foot, five-operating room (OR) surgery center co-managed and operated by Allina and Deerfield, Ill.-based SCA (Nasdaq: SCAI), which has more than 300 locations throughout the country.
Since the project’s opening earlier this year, Davis has heard nothing but good things from the tenants.
“Lakeville is a growth market for MNGI, so they are very pleased to be there and to expand into that growing market,” Mr. Davis says, adding that “we’ve also heard nothing but good things about the location and the building from Allina, which was looking to add to its presence and its offerings in a strong growth market.”
In its announcement of the opening of its space in the Lakeville Specialty Center, Allina Health noted that the facility is conveniently located “along the I-35 corridor in Lakeville and is part of a larger commitment to provide coordinated care in the south metro.”
The system noted that it offers “more than 10 specialty services, such as heart care, dermatology, orthopedics, women’s health and more. Patients can find peace of mind when those unexpected illnesses and injuries happen at the center’s urgent care, which includes Allina Health’s first orthopedic urgent care.”
The surgery center, known as the Allina Health Surgery Center – Lakeville, offers patients “access to convenient, easy-to-schedule surgical services to the south metro.”
“We understand people prefer care close to home and that most of us choose to avoid the hospital setting when possible. The ambulatory surgery center allows patients to access exceptional, convenient care in a lower cost setting than a hospital,” said Bill Evans, VP of Ambulatory Operations for Allina.
“The Allina Health Lakeville Specialty Center is the result of the careful planning of many colleagues and community partners who recognize the importance of adapting to changing health care needs and working together to create options which better serve our patients.”
Mr. Davis adds that the facility’s interior, designed by Minneapolis-based BDH, has received plenty of positive feedback from tenants and patients, as the firm notes that “sculptural tile-clad open staircase that joins the first and second floor lobbies is a prominent focal point, using ambiently lit circular soffits to frame the opening between the two floors. This textured wall of glass follows the staircase upward, providing gentle reflections and natural light.
“The peaceful atmosphere of this facility is further exemplified through an ever-changing gallery of art within a massive digital wall display, tranquil player piano music experience, and cozy natural gas fireplace to enjoy while taking in the scenery of the wetlands just beyond the lobby.”
Demand remains strong
As noted earlier, the growing Lakeville market continues to see a need for more medical space, as the firm’s Ms. Rasmussen tells HREI that it is the Twin Cities metropolitan area’s fastest growing market.
As far as the Davis team is concerned, the Lakeville Specialty Center, which the firm owns through its own internal investors, could’ve attracted even more tenants if it had the room.
As a result of such strong demand from tenants looking to expand their services in the growing Lakeville market, Davis is embarking on another healthcare project in the city. It broke ground recently on a future 14,000 square foot MOB on a 1.6-acre site at 11020 161st St. W. that will be occupied by Midwest Ear, Nose and Throat Specialists (Midwest ENT).
Scheduled for completion in the first quarter of 2025, the single-tenant facility will be Midwest ENT’s fifth location in the suburbs of Greater Minneapolis-St. Paul.
That project is one of four that Davis is currently working on, with the other three being in the planning stages, according to Mr. Davis.
Lakeville Specialty Center
18645 Orchard Trail, Lakeville, Minn.
STATS
■ Project Size: Four stories, 100,500 square feet■ Site size: 4.3 acres
■ Location: Lakeville, Minn., 25 miles south of Minneapolis
■ Start of construction: June 2021
■ Completion: December 2023
■ Occupancy: 100 percent
■ Tenants: Allina Health, MNGI Digestive Health
■ Project cost: $42 million
PLAYERS
■ Developer: Davis
■ Owner: Lakeville MOB Partners, LLC / Mark Davis
■ Architect: Synergy Architecture Studio
■ Contractor: Timco Construction
■ Property management: Davis
■ Lender: Synergy Architecture Studio
