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Healthcare Construction Up 50 Percent

Thursday, May 12th, 2011

Healthcare construction rose nearly 50 percent to $12.6 billion in 2010, an increase from the $8.5 billion reported in 2009.  Many medical development experts are now saying that the industry has come back almost as strongly as prior to the recession.  Healthcare assets remain strong because of the fundamentals of its existence; essentially, the growing and aging population.  Additionally, consolidations have hit the industry hard, with successful mergers typically resulting in redevelopment or expansion plans.

Healthcare construction spending grew more than 10 percent for seven years, and then stalled.  The halt still represents an enhanced growth than almost any other construction market during the recession, which deepened as a result of the credit freeze that began in the fall of 2008.  Throughout the slowdown, hospital construction spending increased nine percent when compared with the period before the credit freeze; spending for specialized medical office buildings fell 17 percent.  The slowdown in medical office spending corresponds to trends in other developed financed sectors, although the slowdown began later and has been less severe.  Reduced income and unhealthy balance sheets caused some developers to lose access to credit.  Others lost credit because lenders had concerns about cash flow coming from new capacity in a depressed economy.

Healthcare construction spending should return to a 10 percent annual growth rate in 2011, a reflection of the usual cyclical surge that follows a recession.  The rebound for hospital construction spending is a result of delayed stimulus plan funding and the resumption of work that was put on hold while healthcare reform was debated in Washington, D.C.

The Urban Land Institute (ULI) has recognized that the growing demand for medical services – needed to treat aging baby boomers, combined with shifts in approaches to treatments to curb rising costs — will significantly increase the need for new and redeveloped medical office buildings.  According to a new report, The Outlook for Health Care, published by the ULI and Seavest Inc., the increase in investment and development to fill that demand will strengthen the healthcare industry’s role as an economic development engine throughout the United States.

The Outlook for Health Care, written by economist Gary Shilling, discusses long-term trends and drivers contributing to the demand for more medical facilities and all-new healthcare facility products such as wellness centers.  The reason is that baby boomers are living longer and need a greater range of services; technology changes have required retrofits or new development; growth in the number of insured Americans under the healthcare reform legislation; ongoing growth in healthcare-related jobs; the shift toward outpatient treatment facilities; and growth in the number of physicians employed by hospitals.

Shilling discussed the report at a forum, “Anchor Institutions as Catalysts for Urban Investments,” hosted by ULI in Washington, D.C.  “Both demand and supply factors point to rapid growth in spending on medical services and medical office buildings for many years.  Medical care will continue to grow rapidly and steadily for two basic reasons – it is an essential human service, and it is heavily supported by the government,” Shilling said.