Healthcare CRE Forecast and Why Each State Requires its Own Deep Dive

SCOTTSDALE, AZ—The healthcare industry was truly tested by the pandemic and highlighted the growing desire for better care delivery and easier patient access. Both of these desires contributed to the growth of healthcare real estate. In a recent session at the GlobeSt. Healthcare Real Estate national conference here in Scottsdale, AZ, keynote speaker John Chang, SVP and national director of research services at Marcus & Millichap, explored industry shifts, demographic changes and the key trends that will continue to dominate the healthcare industry.

“Vaccinations unlocked economic acceleration but new variants prove we are not in the clear yet,” explained Change. When you look across the country, each state and each city is experiencing a unique reality, he noted and as you talk about CRE and the economy across the US, it gets lumped together but if you look at the details in New York, California and other places, every state is coming up with its own rules and that has a big impact, he noted. 

“The business climate in New York is still 10% below where they were before the pandemic, conversely, Salt Lake City is up about 4% total employment before they were before the pandemic. Phoenix is also net positive and there are many cities that are net negative,” he explained. “As you look around the climate across the country, each area requires its own deep dive.”

There are ripples of exceptional growth, Chang explained, and there are some headwinds as well. On the positive side, the most important factor affecting the outlook are vaccines, psychological recovery and reopening. “These things all build positive momentum and allow us to get back to business. It is the feeling about simply feeling better about where we are going.”

Chang noted that the money supply in the US is up by 28% and there is more capital pursuing consumption, investment and commercial real estate than we have seen in years. “We have low interest rates and a new infrastructure bill for $1.2 trillion that will help fuel growth going forward.” 

As for the headwinds, he pointed to the new Covid variant as a wildcard. “Each time a new wave breaks, people become more cautious for a period of time,” he said. “We are seeing a labor shortage and growing labor costs and we have the supply chain issues and disruptions… We have inflation and waning confidence in business leaders and consumers.”

Overall, Chang explained, there are more positive than negative considerations, from an economic standpoint. He pointed out that corporate profits are at record level and drive the economy forward and consumption is at an all-time high. He also expects that holiday sales will be up 8% to 9% over last year. All of those things continue to drive growth and are a key ingredient to things continuing to move forward. “We are starting to see confidence and optimism recovering.”

On the job front, according to Chang, about 80% of the jobs lost during the pandemic have been recovered. The great challenge, though, is that the number of open positions is at an all-time high. “We have a 3-million person labor shortage, which will haunt us,” he said. “We simply don’t have a means to bring enough people back into the workforce.” 

Across the CRE industry, building supply has been a huge topic, he explained, noting that the cost of construction materials are still up 10% over where they were over a year ago. Lumber is up 35% over pre pandemic levels. Steel is up 231% above where it was over the pandemic, which is impacting appliances, auto manufacturers and other industries; in general, rising prices are causing a huge rate increase to anything with steel in it, he noted. “That will hopefully come down as we iron out the supply issues.”

On the healthcare side, national healthcare spending is expected to surpass $5.2 trillion by 2025. “The spending on healthcare and healthcare related services continues to rise and that drives the need for medical space,” he said. “There has generally been a migration southward and that is where we are seeing the greatest demand and need emerging.”

Healthcare is also facing increasing staffing challenges as companies compete for personnel, he explained. “Labor costs are surging and this will be a major challenge going forward.”

Overall, Chang said that he expects medical office space to taper in 2022, which will drive the vacancy down. 

Investment sales, meanwhile, of medical offices are fully recovered, he said. “Liquidity of financing is strong and lots of capital is moving into the medical office space. We are seeing 10-15 bids come in on each asset. And those are the good and competitive bids. It is a very aggressive marketplace.”