2017 will have broken many records in terms of sales transaction activity in healthcare real estate, but it won’t in terms of new construction. Previously we’ve discussed how the volume of medical office construction starts showed some decline in 2016 but was projected to pop back up in 2017. Projected starts are based on what the hospital, provider or developer is estimating in terms of when construction will commence. After following up on all projects scheduled to start in 2017, only 14.9M square feet actually broke ground – 2.5M less than what started in 2016. The rest has been pushed into 2018 or is not moving forward. While some measure of delays is normal, especially for projects with end-of-year projected start dates, this level of delayed volume may suggest more than the usual factors at play. What these figures also show is confirmation of a downward trend. We’re showing 3 consecutive years with a decrease in starts which is now also affecting total deliveries. Only 16.3M square feet was delivered in 2017, 15% less than the previous year’s total of 19.3M.
I wanted to get some color on this trend so I reached out to a few developers to hear their thoughts. Mark Furlan, SVP of Sina Companies in Palm Beach Gardens says “My recent experience has been impacted by having a deal structured with a client, who’s subsequent merger with another has delayed the project. I have also seen clients who have spent a lot of time programing space and trying to stay ahead of the curve in terms of delivery structures. Programing, historically taking 3 months, in a development schedule is taking twice as long.” According to Mark these are contributing factors to long and extended pre-development periods.
Jason Signor, CEO of Caddis out of Texas agrees saying “Many systems are in the midst of negotiating mergers and acquisitions which can sometimes put a hold on new projects.” Physician groups are also affected by this – they don’t want to take on new financial obligations when they are exploring opportunities to sell their practice to a hospital system, according to Signor.
With the hurricanes this past fall, many were predicting widespread effects in terms of labor and materials shortages and subsequent rising costs which could have caused some delays. However, both Furlan and Signor (Florida & Texas respectively) say they haven’t seen this in their markets so it likely isn’t a significant source of pullback.
In addition to M&A activity and delivery strategy shifts holding up projects, hospitals and systems are continuing to feel pressure from tightening reimbursements and a future shrinking patient base as the Trump administration continues in attempts to unwind the ACA. The latest development came from Trump’s tax plan in which the individual mandate penalty is repealed. Analysts say this will reduce the number of insureds by 13 million over the next decade.
Whatever the cause, verified starts volume is now showing a marked slowing and we can expect the reduction in the delivery of outpatient space to continue. Interestingly though, some developers aren’t feeling this personally. According to Signor, “Although the overall trend may be a slowing, from our [Caddis’] perspective as a third-party developer, there has been a significant uptick in activity in the last two years.”
Furlan also adds that “…healthcare clients need delivery experts to help them plan and deliver these projects. We bring expertise and third-party coverage as they seek board approvals.”
Revista is in the midst of our 2nd annual Healthcare Development Survey in which we determine how many of the projects from 2017 were developed by a third party rather than the provider. In 2016 developers made up about 30% of the market. It will be interesting to see if they are beginning to take a bigger slice of the pie! Contact Mike Hargrave if you would like to participate in this survey.