Healthcare construction primed to rebound faster than other sectors

While nonresidential construction is expected to continue to lag through much of 2021, healthcare is projected to fare better than other sectors like office and manufacturing, according to a new report.

Nonresidential building construction starts were down 24% in 2020 compared to 2019, which is expected to drag overall construction spending in 2021, according to a new report from commercial real estate firm JLL that projects a 5% to 8% spending dip this year. While many long-term healthcare capital projects were put on hold last year, JLL expects those to resume by the end of the year.

“We’re forecasting by the end of the year that healthcare companies will reopen their capital budgets for long-term plans rather than just the short-term triage plans we saw in 2020,” said Henry D’Esposito, a senior research analyst for JLL. “We’re ranking healthcare as one of the stronger sectors going into this year.”

How quickly those capital projects will resume will depend on how quickly the U.S. gets control of the pandemic, vaccination efforts, when healthcare services reach pre-pandemic levels and the pace of the broader economic recovery, D’Esposito said. He noted that healthcare construction has been relatively insulated compared to other sectors like office, manufacturing and retail.

In the early stages of the pandemic, providers diverted funds from their capital budgets to boost capacity, secure supplies and maintain adequate staffing levels.

“Many projects have been shut down or slowed down,” construction management firm LF Driscoll wrote in Modern Healthcare’s 2020 Construction & Design survey. “We have had outright cancellations of projects that have been awarded but not yet started.”

Hospitals had to build temporary spaces or convert existing facilities to manage an influx of COVID-19 patients, which offset the decline in the long-term capital projects. But even amid the pandemic, some larger construction projects continued.

Seasonally adjusted healthcare construction spending increased 0.6% from April through December of 2019 to that same period in 2020, according to Modern Healthcare’s analysis of Census Bureau data. Meanwhile, manufacturing and office construction spending dropped 9.7% and 5.3%, respectively, over that span.

“Healthcare performed well compared to the rest of the economy,” D’Esposito said.

As for the broader nonresidential construction sector, construction volumes will likely start to increase month-over-month in the third or fourth quarter, returning to historical growth levels in 2022, according to the JLL report.

Meanwhile, single-family residential building is booming, which has contributed to a lumber shortage and a corresponding 36% spike in prices. That is expected to inflate material costs by 4% to 6% in 2021, D’Esposito said, although that isn’t likely to slow construction projects. Labor costs are expected to increase in the range of 2% to 5% this year.

“We expect economic growth and construction demand to pick up substantially in the second half of the year, leading us into a growth market in 2022,” D’Esposito said. “The first six months will be the tough part.”

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