Healthcare
Capital Markets
October 2021
Outpatient medical construction delivers results under pressure during the pandemic 
Hospital and medical office construction starts diverging on a quarterly basis
Source: Revista
The pandemic validated the outpatient and off-campus healthcare delivery thesis 
  • U.S. medical office construction starts held up well during the global pandemic relative to hospital projects, showing only a modest drop off on a trailing twelve months’ basis.  On the other hand, hospital construction starts bore the brunt of the slowdown, no doubt affected by the substantial capital investments per square foot and uncertainty about inpatient delivery at the onset of the pandemic.  Seventy-six percent of health systems reported one or more hospital projects were delayed due to the pandemic, and 29% reported that one or more projects were cancelled.
  • While completion of new hospital projects and medical office are down 31% and 27%, respectively, since the beginning of 2020, JLL views this as a temporary slowdown driven by delays related to labor and material shortages.   As of the third quarter 2021, 19.4 million square feet of hospital facilities and 18.3 million square feet of medical office buildings were completed on a trailing twelve-month basis, accounting for 1.3% and 1.2% of total inventory, respectively. The near parity of hospital and medical office deliveries is a major indicator of the momentum in outpatient care since the inventory of inpatient space is 4 times that of outpatient square footage! JLL expects the relative mix to shift through the next generation of healthcare delivery.
The growth in outpatient care is occurring regardless of the pandemic and is evident in the numbers
  • Activity is ramping up again for medical office, while hospital development continues to wane. As of third quarter 2021, 20.9 million square feet of hospital starts were recorded on a trailing twelve-month basis, while 23.7 million square feet of medical office building starts were recorded during the same period. Of hospital projects, more than half are expansion projects (52-59%) meaning that health systems are doubling down on their campuses; new hospitals and campuses are only about a quarter of projects (23-27%) and one-fifth or less are replacement hospitals. 
  • Outpatient care is increasingly the preferred mode of care for hospitals to support non-COVID patient health and to mitigate hospital capacity limitations.  Separately, this trend is being driven by the Centers for Medicare and Medicaid Services as it moves toward elimination of the inpatient-only list of services by 2024, allowing physicians to determine the best site of care. Commercial payors are supporting this trend as well - reimbursements are increasingly site neutral with growing reluctance to pay higher hospital outpatient department rates.  These trends add up to healthcare providers increasingly referring to lower cost settings of care.

Rising construction costs will further challenge new development activity

  • Backlogs and supply chain challenges caused materials and labor costs to increase markedly in the twelve months through August 2021, averaging 23.1% and 4.5%, respectively.  While the acceleration in costs is beginning to flatten, they are still up significantly across all major material categories in the last three years. Final construction costs are expected to rise a further 4.5% to 7% next year, according to JLL’s recently released Construction Outlook.
  • For medical office, health systems are highly sensitive to occupancy costs given pressure on operating margins.  Increasingly, they are responding to higher construction costs at new leased locations by taking lower concessions and funding more tenant improvements from internal capital.  Health system cash resources have been ample during the pandemic despite continued pressure on operating financial results.
 
Recent activity
New Listing - Investment Sale
Foxhill Medical Office Building
52,161 s.f.
Overland Park, KS
New Listing - Investment Sale
Hawthorn Commons
48,942 s.f.
Vernon Hills, IL
New Listing - Debt Placement
Burke Medical Center
26,669 s.f.
Burke, VA
New Listing - Investment Sale
Memorial Hospital at Gulfport
11,400 s.f.
Diamondhead, MS
New Listing - Investment Sale
Centennial Surgery Center
8,763 s.f.
Las Vegas, NV
Closed - Debt Placement
Phoenix MOB Portfolio
206,936 s.f.
Phoenix & Glendale, AZ
Closed - Investment Sale
The Keith Corp MOB Portfolio
72,499 s.f.
Charlotte, Matthews & Marion, NC
Closed - Investment Sale
Lifespan Oak Hill Medical Office Building
46,645 s.f.
Pawtucket, RI
Closed - Investment Sale
700 Broadway
39,115 s.f.
Seattle, WA
Closed - Investment Sale
Alamo Quarry Center 
38,370 s.f.
San Antonio, TX
 
Closed - Investment Sale
4343 Lankershim
32,990 s.f.
North Hollywood, CA
 
 
Have you seen the H2 2021 Construction Outlook?
Click the link to access the reports.
 
Want to receive more deal opportunities? Register for the JLL Investor Center, our new portal offering secure and easy access to our global inventory of investment opportunities. 

From any device, anywhere in the world, you can search and view listings, receive invitations to private listings, and edit your preferences so you only receive opportunities that meet your specific criteria. Register for the Investor Center here>
 
Contact us: