Healthcare market weakens amid federal cutbacks

September 01, 2005 |

Healthcare construction spending is currently only 2.3% above a year ago, and has been stuck at a $35–36 billion annual pace for more than a year, after rising 40% over the previous two years.

The recent market weakness has been entirely in medical office buildings and special care facilities, such as nursing homes. Medical office space has expanded recently by moving into vacant general office space. The construction of special care facilities has been trimmed by the cutbacks in federal funding needed to keep the budget deficit down.

Public and private hospital spending has continued to increase slightly faster than cost inflation. A 21% gain in healthcare construction spending is forecast from mid-2005 to the end of 2006.

Short-term changes in healthcare construction are driven entirely by the availability of funds, while space demand is the dominant long-term market driver. More money is coming. Aggregate private medical insurance receipts have been rising quickly for more than a year, with 180,000 new jobs a month and the introduction of lower cost employer medical insurance plans for previously uninsured workers. The availability of public funds has improved significantly due to double-digit increases in tax collections at all levels of government and much higher cash reserves for state and local governments.

Spending increases for medical office and clinics, about 25% of total healthcare construction, are not likely until next winter when higher rents and less availability of general office space forces the construction of more specialized medical offices in the tightest office markets.

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