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June 6, 2019

Destination Medical Center, North? Duluth readies for massive medical investment

Dan Kraker
Minnesota Public Radio News

Duluth Mayor Emily Larson does not hold back when she describes the potential impact of the more than $1 billion in health care investment planned for her city over the next decade.

"There really is nothing like it, this kind of private investment happening concurrently," she said. "The density, the impact — it is completely catalytic and transformational."

Duluth is home to not one but two regional medical centers: Essentia Health and St. Luke's. They're located just a few blocks apart on the hillside in the city's downtown. And they're both planning major redevelopment projects at the same time — work that's expected to modernize their facilities and spark broader economic growth for the city.

Here's what's in the works: St. Luke's plans to spend nearly $250 million in three phases over the next decade to build a new medical campus. It broke ground last month on a new emergency department.

The final phase will include construction of a new hospital tower that will result in a 11-story complex.

"The technology that's involved in health care has changed over time. And [the old] building is not suited for all of that technology," explained spokesperson Jessica Stauber. "We also have some double rooms. Consumers want privacy. So we want to deliver on that expectation."

A few blocks down Superior Street, Essentia Health is planning to spend $800 million on a new campus that will feature a new 16-story glass tower. Like St. Luke's, Essentia says the new facility will better match how modern medicine is practiced.

By building up, rather than out, Essentia will also consolidate its overall footprint from about four city blocks to two, which will free up space for additional development in its neighborhood on the east side of downtown.

Essentia plans to break ground in September, with move-in planned for the fall of 2022.

On top of the more than $1 billion in private investment from the two health care companies, the city of Duluth will be getting nearly $100 million for parking ramps, streets and other infrastructure from the state. The funds were outlined in the new state budget Gov. Tim Walz signed last week.

The bill that passed was a slimmed-down version of the $164 million package that was introduced at the state Legislature this session. Provisions including a commitment to spend 10 percent of state funds on affordable housing in the area surrounding the hospitals, and to create an advisory board to plan development within the district were scrapped before the final bill was approved.

Still, during a visit to Duluth Monday to tout the package's approval, Walz said the public-private partnership "follows a model I am certainly supportive of." And city and state officials, along with hospital leaders, say they expect the state money to stimulate other investment.

"We've seen some of that happening already in Duluth, and we expect to see more of that," said Mark Hayward, Essentia's senior vice president for operations. "Once we've put this amount of investment in this space and in this community, we think others will follow suit, and that'll lift the economic engine for the whole community and for the region."

It's already happening. Only a block away from Essentia's growing campus, developers are planning to break ground on a $75 million apartment tower, including street-level space for a small grocery store, later this fall.

Brian Forcier, a managing partner of Duluth real estate developers Titanium Partners, said he had initially planned the apartment tower to be a $23 million project. But he tripled the investment because of the health care campus expansions, and is now planning a 15-story building.

Forcier and Larson said the building — which has been named The Lakeview — is also taking advantage of the federal Opportunity Zone tax credit, which was included in the 2017 federal tax overhaul and designed to attract outside capital to low-income and urban communities.

In addition, the project benefited from $6.2 million in tax increment financing approved by the city, which will funnel new property tax revenue from the development to help pay for qualified costs to install public infrastructure.

Forcier said a project of this scale would not have been possible in Duluth without the new federal tax credit and the hospital expansions.

"With a community like Duluth," he said, "you have to have a story of progress, you have to have a story of growth." Until now, he said, Duluth had been a tough sell to outside investors.

But Forcier is banking on doctors and other health care professionals renting an apartment in his building — he expects rent will average around $2,000 a month — walking to work, and, in the process, enlivening the city's downtown.

Health care already makes up nearly a quarter of northeast Minnesota's total employment. Essentia is Duluth's largest employer, with more than 7,000 workers in the city; St. Luke's employs more than 2,700 people in Duluth.

And the Minnesota Department of Employment and Economic Development predicts that health care sector will be the fastest-growing sector of the economy in the region, with 10 percent employment growth by 2026.

But one thing the medical center expansion project doesn't address is the city's shortage of low- and moderate-income housing.

"We have nearly met or exceeded housing needs for people at the higher end of income spectrum," said Joel Kilgour, who chairs an affordable housing coalition in Duluth made up of more than 20 nonprofits and government agencies. "We're moving at a snail's pace for folks who are needing more affordable housing."

But the new medical district development, Kilgour said, provides a great opportunity to build desperately needed affordable housing on the land that will be freed up when Essentia moves into its new building. The recently passed state funding includes $10 million to demolish the old Essentia Health-St. Mary's Medical Center.

State Sen. Erik Simonson, DFL-Duluth, who sponsored the bill that's provided the investment in the medical district, said he would like to see the area turned into a mixed-use development, possibly with involvement from the University of Minnesota Duluth.

Larson, the mayor, agrees it creates a rare opportunity.

"We're a landlocked city, we're a fully developed city," she said. The several parcels of land opening up on the old St. Mary's site will offer the city an opportunity for growth in a downtown that rarely has such openings.

But it also opens the conversation for the way things like affordable housing and green space factor in to the city's long-range planning.

Larson said the public will have ample opportunity to weigh in on those discussions in the coming years.

In the meantime, she's excited to see more construction cranes adding to Duluth's skyline this fall.