February 25, 2021
John B. Mugford

Despite COVID-19 Pandemic, Healthcare Construction Numbers Remain Strong

Even though the professionals involved in MOBs correctly predicted that investor demand would remain strong for the product type during the COVID-19 pandemic, some involved in development expressed concern that construction numbers could fall as healthcare systems and providers would be forced to focus on a surge of patients instead of planning new projects.

But for the most part, that hasn’t been the case, according to MOB and hospital construction numbers recently released by Revista.

“Medical office construction has remained very strong throughout COVID, both in terms of starts and completions,” Revista Principal Hilda Flower Martin said during a recent webcast, part of Revista’s ongoing “Content & Connections: A Virtual Event Series,” which the firm is offering in 2021 in lieu of its annual in-person conference typically held in late January.

Ms. Martin, a principal with the HRE research and data firm, added, “Completions slowed a little bit towards the end of the year (2020), but starts remain pretty much in line (with past years), as there was about 21.0 million square feet of MOB space started” as of the fourth quarter (Q4) of 2020 on a trailing 12-month basis (TTM).

The MOB projects being built are typically well pre-leased and continue to get larger, Ms. Martin added, saying the average size of MOBs being built now tops 60,000 square feet, compared to about 25,000 to 30,000 square feet in the 1980s.

“Today, there are lots of projects that are over that 100,000 square foot mark, and they tend to be multispecialty, one-stop-shop buildings that have a lot of services in them, including a lab, a pharmacy … urgent care and maybe even a surgery center,” she said.

In what can be considered good news for third-party MOB developers, the group as a whole accounted for about 44 percent of projects in 2020, with about 56 percent being self-developed by health systems. A year earlier, in 2019, third-party firms accounted for about 38 percent of all MOB projects after a number of years of being near, or less than, 30 percent.

“Over the last number of years, it’s typically been around a quarter of projects being third-party developed,” Ms. Martin said. “But we really started to see that shift in 2019 and into 2020 … and this immediately makes you wonder at the question: Is this because there are more projects going up that aren’t related to hospital systems, that are just something strategic in a particular area? Or, are hospital systems more amenable to having a third-party develop their MOBs?”

However, in examining the data further, Ms. Martin noted that 63 percent of MOB projects in 2020 were affiliated with health systems, meaning “it’s a combination” of projects being built that are not affiliated with health systems and health systems being “more amenable to having a third-party developer.”

“We’re also seeing a lot of localized projects … being developed by local developers that may not always do medical office,” she added. “That might not be their number one development. It could be a residential project. It could be a mixed-use project or seniors housing and they’re adding an MOB to it. There are a lot of those projects (being done by local developers) in addition to the third-party healthcare developers that we all know.”

In addition to reporting on MOB construction, Ms. Martin provided an update on 2020 hospital construction, indicating that after four straight quarters of increases in the amount of square footage started, Q4 saw a somewhat sharp decline from the previous quarter.

However, the number of starts in Q4 remained historically strong, at 27.9 million square feet of new or expanded space on a TTM basis after the 35.9 million square feet of space started in Q3 (TTM), the highest square footage started in five years.

“So there was a slowdown in hospital construction (in Q4), Ms. Martin said, “but if you look at the pipeline, there are 145 new hospitals underway right now – 145! Those projects are averaging 260,000 square feet, 111 beds. There are currently 235 expansion projects underway, and those are 186,000 square feet on average. So there are plenty of big projects currently in the hospital construction pipeline.”