The downtown Sacramento railyard in 2014. Kaiser Permanente announced Thursday it has agreed to buy 18 acres at the railyard’s northwest corner for a major new hospital. Randy Pench Sacramento Bee file
The downtown Sacramento railyard in 2014. Kaiser Permanente announced Thursday it has agreed to buy 18 acres at the railyard’s northwest corner for a major new hospital. Randy Pench Sacramento Bee file

Real Estate News

Kaiser deal signals new direction for Sacramento’s downtown railyard

By Dale Kasler, Tony Bizjak and Bill Lindelof

dkasler@sacbee.com

June 25, 2015 11:14 AM

UPDATED June 26, 2015 10:31 AM

The developer of Sacramento’s shuttered downtown railyard has landed a major hospital as its anchor tenant – and is sketching a new blueprint for the vast expanse of land just north of downtown that city officials have been trying to redevelop for more than 20 years.

Kaiser Permanente announced Thursday it has agreed to buy 18 acres at the railyard’s northwest corner for a major new hospital. The Oakland health care giant became the first commercial enterprise to buy land in the railyard since the final Union Pacific workers pulled out in 1999.

“It anchors this development,” said Sacramento developer Larry Kelley, who’s in the process of buying the railyard from an Illinois real estate company. “These are really important first steps.”

Besides jump-starting the development, Kaiser’s purchase illustrates a new vision that has emerged in the past year or so for the 240-acre railyard, the western terminus for the transcontinental railroad and a centerpiece of the city’s history. Previous developers stressed retailing, entertainment and housing. While those elements will be well-represented in the new design, Kelley’s company, Downtown Railyard Venture LLC, is focusing instead on offices and other uses that generate lots of jobs.

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“Kaiser fits right into that,” Kelley said. “It’s going to bring a high job count. You’re talking thousands of workers.”

Kelley’s firm is also talking to UC Davis about a major educational and research institute devoted to food issues, and has reserved space for a proposed $125 million soccer stadium if Sacramento gains a Major League Soccer expansion team. A new Sacramento County courthouse is expected to be built at the railyard, and developers have talked about opening a public market as well.

Hospitals are expensive, and the Kaiser project would be among the biggest construction jobs Sacramento has seen in years. Kaiser spent a reported $600 million building a hospital in San Leandro last year and $1.3 billion on a hospital in Oakland. Sutter Medical Center’s new midtown expansion clocked in at $812 million.

Kaiser wouldn’t discuss the cost of a new hospital at the railyard or the amount it’s paying for the land.

“We are excited about the potential that this land holds for a new hospital,” said Ron Groepper, senior vice president and area manager for Kaiser, in a prepared statement.

The hospital chain also wouldn’t say whether the railyard project would replace its main Sacramento hospital on Morse Avenue, which will need a major overhaul to meet earthquake specifications no later than 2030. A spokesman reiterated Kaiser’s earlier statements on the Morse facility’s future, which says “we will eventually have to rebuild the hospital. We will be evaluating and considering alternative options for our current hospital at Morse Avenue that will provide for the health needs of our members and the Arden-Arcade community.”

The land buy continues Kaiser’s investment in downtown. Last year, Kaiser purchased a six-story, 195,000-square-foot building at Fifth and J streets, close to the railyard. Kaiser intends to use it as a medical office building.

The new railyard hospital won’t spring up overnight. Kelley’s company is still working to complete the site purchase, a two-year process complicated by issues surrounding the ongoing cleanup of toxic materials left behind by the railroad. Denton Kelley, managing principal of the development firm and Larry’s son, said the deal is now expected to close within 60 days.

Jared Ficker, spokesman for the current owner, Illinois-based InvenTrust Properties Corp., confirmed that the cleanup issues have been settled and the deal is ready to be wrapped up.

Beyond that, Denton Kelley said it will take about a year to get the city entitlements needed to reflect the new vision for the railyard. Hospital construction might not start for at least two years, Kaiser said.

City officials seem ready to embrace the blueprint. Mayor Kevin Johnson issued a statement calling the hospital a “big deal for Sacramento.” He said Kaiser will be a “cornerstone” for the railyard, a land parcel that he’s recently begun calling the city’s new “innovation district,” where research institutions and startups can cluster.

City Council member Jeff Harris, whose district includes the railyard, said the Kaiser project “opens a lot of doors to the development of the railyard. This helps move our vision forward to create dense housing downtown. ... If we can get jobs, and obviously hospitals create a lot of jobs, and have people living close to where they work, and if we can get entertainment in that same district, then that is the perfect trifecta of how to create a vibrant downtown.”

Councilman Steve Hansen, who represents downtown, also welcomed the Kaiser news.

“We have been working and talking for 100 years about developing the railyards,” he said, with some exaggeration. “And now it feels like it is going to happen. This is the kind of announcement we needed to kind of just push it.”

The city’s current plan for the railyard, adopted in 2007, calls for as many as 12,000 housing units. Although Denton Kelley said his firm expects to scale back the emphasis on housing, he said the new plan will still include thousands of new dwellings.

So far, one residential project has been proposed: a 200-unit affordable-housing apartment complex near the southeast corner of the property, at Seventh and G streets. Denton Kelley said the developer, USA Properties Fund Inc., hasn’t yet purchased land for the project. The apartment complex would be built near the site of the new $300 million county courthouse expected to break ground in a couple of years or so.

 

Assuming they come to fruition, the Kaiser hospital and other projects would validate years of effort by city officials to prep the railyard for its next chapter. Millions have been spent cleaning the site and building roads, bridges and other infrastructure.

The site, once one of the largest industrial complexes in the West, has gone through multiple developers. InvenTrust has owned it since 2010, when previous owner Thomas Enterprises of Georgia defaulted on its debts.

As developers have come and gone, so have the plans. In the early 2000s, a Venice Beach developer who helped engineer facelifts of downtown San Diego and Salt Lake City brought a vision for a sprawling entertainment, retailing and restaurant mecca. One of the first retailers to express interest in the railyard, the Bass Pro Shops chain, planned a giant store in the same general vicinity now being targeted by Kaiser. And for a few weeks in 2012, before the deal imploded, the southern end of the site was going to become the new home of the Sacramento Kings.

Kaiser’s decision to embrace the railyard leaves a hole of sorts. City officials had speculated that the health care giant might be interested in building a hospital at the current site of Sleep Train Arena in Natomas. The site will become available after the Kings move to their new arena at Downtown Plaza in October 2016.

If the Kings are disappointed about losing a potential occupant for their land in Natomas, they aren’t showing it. “We’re excited to have Kaiser Permanente join the momentum in downtown Sacramento,” said team President Chris Granger in a prepared statement.

Dale Kasler: 916-321-1066, @dakasler