U.S. Healthcare Construction's Heartbeat Is Unstable As Pandemic Ravages Sector's Finances
The U.S. healthcare system is battling an invasive sickness that may weaken it for the near future and may alter it permanently.
The novel coronavirus has killed off profit-producing elective surgeries, diminishing revenue in the medical industry. That will ultimately impact everything from patient services to capital project expenditures and healthcare-related construction.
"As the whole pandemic has evolved, [so] has the impact on hospitals and more specifically their capital expense plans," FTI Consulting Senior Director of FLC Construction Solutions Travis Burggraf told Bisnow after FTI released a study called "Impact of The Coronavirus Pandemic On Healthcare Construction Projects."
"Now the biggest issue is really the impact to income and revenue, so as hospitals were requesting patients no longer visit hospitals unless it was life-threatening, they were forgoing elective surgeries," Burggraf said. "They were basically removing what was a known source of income revenue for them for what was an unknown source."
Delaying or limiting elective surgeries and other standard procedures has come at a huge cost for U.S. hospitals.
New data from FAIR Health shows between March 2019 and March 2020, revenue from the use of U.S. professional medical services fell about 45%. And from April 2019 to April 2020, hospital usage fell about 68% in the midst of the pandemic, with revenue plummeting 48%, FAIR Health reported.
"[A] hospital on the East Coast is projecting $2B in losses," Burggraf said.
Those shortfalls could grow if public funding to hospitals dries up as municipal budgets deal with shortfalls in tax collection.
The healthcare industry has been growing faster than any other in recent years and became the United States' largest employer in 2019, according to the Bureau of Labor Statistics. Construction has been strong, too. There were 439 medical office buildings and 491 hospitals under construction across the country in July 2019, accounting for 108.3M SF and $67.2B, according to Revista data. Most of the growth lately has been in surgery centers, which exploded 82% in the U.S. since 2000, JLL said in its 2019 Healthcare Real Estate Outlook. Still, JLL said at the time that new healthcare construction was not keeping pace with increased demand.
Since the pandemic began, the tide of healthcare construction has turned immeasurably in many cities.
After adding seven new hospitals in 2018 and early 2019, Dallas-Fort Worth's proposed hospital construction is hovering at zero in every major DFW submarket, with the exception of Tarrant County, data from CoStar Group shows. Out of 12 North Texas counties, only four — Collin, Tarrant, Denton and Ellis — have healthcare projects under construction.
"The uncertainty surrounding the pandemic is putting many potential projects on hold," CoStar Managing Director of Analytics Paul Hendershot said.
"Another consideration when looking at hospitals, they are often funded through local tax revenues. Many cities and counties have already taken measures to reduce costs by furloughing employees and limiting service hours. Taking on a major project like a hospital will place additional strain on many municipal budgets that are already anticipating shortfalls in 2020."
Burggraf said the outcome for individual hospitals depends on their location, the coronavirus situation in their market and the financial health of their facility heading into the pandemic.
"At the onset those that were financially stable continued on with construction projects that were underway. They had the funds put in place and already secured for those projects."
But others, like a $250M hospital tower in Denver, were put on hold for an undetermined amount of time, Burggraf told Bisnow.
A reduction in construction could also simply stem from the fact that hospital systems are a little too busy right now to plan expansions.
Leaders for UT Southwestern in Dallas and Methodist Health System say they went into the pandemic solid financially and any slowdown in construction or capital expenditures has more to do with hospitals shifting their focus to lifesaving measures than to any financial constraints impacting their ability to execute capital projects.
"We are not slowing down anything purposefully," Methodist Health System in DFW President Pam Stoyanoff said during a Bisnow healthcare webinar Tuesday. "Our slowing down is because we are concentrating on COVID, and because our teams are working COVID issues, they don't have time to work on pro formas, so it's slowing down naturally for a time so we can be attentive to it."
While the coronavirus pandemic has impacted every U.S. healthcare market, many medical systems went into the crisis well-capitalized and supported by a growing local population that will ultimately need more healthcare facilities in some form going forward, experts say.
Stoyanoff said there are no capital issues or current fears over whether hospital projects can be maintained or grow in the near future, but she said if the coronavirus keeps spreading over a longer period of time, hospitals may have to rethink their capital overlays.
Even where the pandemic hasn't halted expansion plans, it may have adjusted them, and hospitals and healthcare systems' design and operation in the future will likely be impacted by the virus.
"I think a lot of it has to do with [hospital] systems and the way they capitalize themselves ... the money that they have," Turner Construction Director of Healthcare for the Texas Region Steve Whitcraft said. "The cash-rich, the folks that are ready to build are going to continue to build. They're going to change maybe the design of what they are building. They may not be building as many things for elective procedures, which were outpatient anyway. You may not see as many of those immediately."
There may be a stronger focus on remote visits and architectural changes to acute care facilities and healthcare locations that are designed specifically to separate coronavirus impacted patients from general hospital populations, Whitcraft said.
Hospitals have leaned heavily on telemedicine and are using technology to enhance contact between patients and doctors at a distance, creating a more mobile experience for patients.
"All of these trends have been accelerated by COVID-19 and are certainly going to play a role in shaping the real estate or the footprint needs for hospitals and health systems moving forward," said Scott Christensen, vice president of advisory and research firm Kaufman Hall.
Kaufman Hall analysts are periodically documenting the impact of the virus on U.S. hospitals, and there are some silver linings to the pandemic.
“We are seeing COVID on a positive note accelerate some trends that were already there ... movement to telehealth [for example]," Kaufman Hall Managing Director Jim Blake said. "The other movement is from main hospitals to [providing services] in ambulatory centers or other [facilities]."
As far as predicting when hospitals will return to normal or if they will face more financial impacts on construction and planned expansions, Kaufman Hall experts said the data on the virus is too uncertain to make those calls right now.
But Transwestern National Managing Director of Health Care Advisory Services John Huff remains bullish on the healthcare industry. The capital supply remains there with equity still plentiful for projects, he said. The sector could even get some new investors as demand for and interest in asset classes like office and retail may diminish in the pandemic-driven downturn.
"The money in [the] healthcare space continues to grow," he said.
And Huff is optimistic about DFW in particular even though the area is suffering through a surge of coronavirus cases four months after the initial lockdown. The metro is adding jobs and people still, and new residents will need some form of healthcare, he said.