If there is one sure thing in the world of construction economics, it’s that the health care sector will serve as a source of opportunity for contractors in the future. After all, by the year 2030, one in five Americans will be at least 65 years old. According to the
U.S. Census Bureau’s national population projections, by 2020 the number of Americans 65 years or older will expand from 40 million to 54.6 million, an increase of 36 percent.
In 2009, about 5,800 registered hospitals existed in the United States with nearly one million staffed beds, according to the
American Hospital Association. If the number of hospitals expands in conjunction with the senior population during the next two decades, the nation would see more than 2,000 additional hospitals with approximately 340,000 more beds. This rough estimate provides some sense of the scale of construction likely to take place in the foreseeable future. In addition to new hospital construction and renovation, expect an array of related construction projects, including nursing homes, assisted living centers, physician offices, clinics, outpatient centers and continuing care retirement communities.
Of course, the health care industry is not immune to the economic downturn. Health care-related construction spending declined 3.6 percent in 2009 and another 11.2 percent in 2010. Reed Construction Data forecasts an additional 1.1 percent decline in 2011. Many of the culprits can be identified easily, including uncertainty regarding physician and hospital Medicare and Medicaid reimbursement, constrained capital markets, lingering uncertainty regarding the fate of health care reform, rising materials costs and the fact that so many facility expansions already took place during the early 2000s.
Moreover, medical centers have been spending a growing share of their capital budgets on non-construction items. In 2008, hospitals spent an average of 21 percent of their capital budgets on new construction projects. This figure dipped to 17 percent in 2009 and is estimated to have declined to roughly 16 percent in 2010. Similarly, the share of capital budgets spent on facility modernization declined from 25 percent in 2008 to just 16 percent in 2009.
Though the near term may see subdued construction volumes, the combination of demographics, technological transformation and health care reform ultimately will triumph. This may happen sooner rather than later. Reed Construction Data forecasts an 8 percent increase in health care construction spending for 2012 and a 13 percent increase in 2013.
Shift in Emphasis
Not only will construction volumes shift over time, but so, too, will the nature of construction. For instance, new construction’s share of spending may dip while spending on renovations and IT infrastructure may expand. During the fourth quarter of 2010, there was an estimated $24.9 billion of new hospitals and clinics under construction, a 10 percent decline from a year earlier. While the planning pipeline is now more crowded—up to nearly $28 billion from $26 billion a year earlier—much of this could be attributed to projects put on hold. Moreover, the planning pipeline remains far smaller than it was in 2008, when $36.3 billion in project spending was identified.
By late last year, renovation or expansion accounted for 73 percent of construction projects at hospitals that responded to a
Health Facilities Management/
American Society for Healthcare Engineering (HFM/ASHE) survey. This largely is because of the desire to address needs while avoiding the higher costs and debt associated with new construction. According to Reed Construction Data, roughly two-thirds of current renovation projects cost less than $3 million.
Related to the increased demand for renovations is a focus on infrastructure. One-third of the 598 hospitals in a recent HFM/ASHE survey indicated they were in the process of replacing or upgrading their ventilation systems or air handlers. More than one in four were upgrading building services systems to satisfy IT infrastructure needs in light of the shift toward electronic medical records, and one in five was planning to upgrade, or was in the process of upgrading, a data center.
In its current incarnation, health care reform also is likely to contribute to additional spending on medical facilities. According to the
National Real Estate Investor, the 32 million individuals who will be covered under the new law will require 64 million square feet of additional space, which utilizes an industry multiplier of approximately two square feet per patient. This overall square footage estimate will be roughly 11 percent higher by 2019.
Health care reform also has geographic implications because many of the newly insured will be lower-income people living in urban areas. Correspondingly, much of the related construction spending will occur in cities. Many uninsured people presently use emergency rooms as their gateway to treatment, but the industry would like to reconfigure facilities to de-emphasize emergency room care in favor of traditional physician office care. Hospital-related construction also will be bolstered by the ongoing shift from private physician practice to direct hospital employment.
Looking Ahead
The recent turmoil in the financial markets and the broader economy may further delay the health care-related construction recovery. However, demographics, technology, reform, and the wear and tear of a nonstop society ultimately will translate into rapidly increasing construction opportunities. Contractors closely tied to the health care industry are likely to be among the best performers during the next two decades.