2022 was a year with high and low points for the health care real estate industry. This article summarizes a number of key takeaways and trends that we tracked over the past year.
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The Pandemic Largely Fades, but Still Lingers
Early in the year, vaccination rates, masking requirements and Covid-19-related deaths still made headlines. By mid-year, those topics disappeared from the front page for the first time since early 2020. Even though the pandemic seems behind us, we are not out of the woods. In November and December, health experts reported an alarming number of Covid-19, flu and RSV cases, the combination of which they refer to as a “tripledemic”. Expect labor shortage resulting from the tripledemic and its strains to continue to affect health care facility planning well into 2023.
Inflation and Interest Rates Dominate Headlines
Inflation and interest rates, including as to the Consumer Price Index (“CPI”), dominated headlines this year. The CPI hovered around 7% for most of 2022 and peaked mid-year at around 9%. In an effort to tamp down inflation and bolster the economy, the Federal Reserve raised interest rates at a clip not seen in decades (nearly 400 basis points over 2022). Those increased interest rates directly affected health care real estate, including accelerating some projects and closings to avoid losing valuable rate locks, and in other cases, bringing some projects and bond transactions to a halt.
Construction Costs Remain Elevated
A number of construction data reports noted a significant increase in construction costs and in the cost of construction materials. At one point, construction costs overall were up 42%, the cost of steel was up 118%, fuel was up 50% and concrete was up 14%. Although the health care industry navigated most of these challenges—largely through savings in other areas of project development—continued increases in construction costs will strain and potentially jeopardize the feasibility of some projects moving forward.
Workforce Challenges a “National Emergency” | Hospitals Operate in the Red
A letter to Congress earlier this year from American Hospital Association highlights the financial struggles many hospitals faced in 2022—largely as a result of continuing workforce challenges (including increased reliance on contract and travel staffing labor and the excessive costs associated therewith). In that letter, the AHA asserted those workforce challenges “are a national emergency that demand immediate attention from all levels of government and workable solutions.” The letter went on to say that, “hospitals are facing a critical shortage of workers. With 23% of hospitals reporting a critical staffing shortage to the government, hospitals have seen a decrease of nearly 105,000 employees since February 2020.”
Now that pandemic-relief funding is long gone to assist with issues like the foregoing workforce challenges (as well as increased supply chain expenses and drug costs), several reports noted that a significant number of hospitals (more than half) are operating with negative margins and one report posited 2022 could be the “worst financial year in decades” for hospitals. It should therefore come as no surprise that Moody’s recently reported that around 80% of U.S. health care companies now have a speculative credit rating. Yet those issues were not uniform across all providers. One report concluded that for-profit hospital operators are outperforming their non-profit peers, with several public for-profit hospital operators reporting positive operating margins late in 2022.
Growth Markets Making the News
Several reports outlined the top growth markets in the U.S. The top states in terms of business climate were Arizona, Colorado, Florida, Georgia, North Carolina and Texas. Top metro areas making the news were Atlanta, Austin, Charlotte, Denver, Houston, Las Vegas, Miami, Phoenix and Raleigh-Durham, with the Phoenix, Arizona metro areas specifically receiving a lot of attention from investors and health care providers. In a few cases, health systems competed for undeveloped land. Abrazo Health acquired 27 acres in Buckeye, Arizona, and Banner Health acquired 48 acres in Scottsdale, Arizona.
Access to Care and Certificate of Need Laws
As the effects of the pandemic began to subside, legislators, policy experts and health care providers pushed for greater access to care and Certificate of Need (“CON”) reform. States like Georgia, North Carolina, South Carolina and West Virginia all considered CON reforms that would make it easier for new health care facilities to be established. The legislative efforts were unsuccessful in many cases. Most of the state lawmakers considering CON reform were not ready for a complete rollback of CONs. Instead, they were more willing to consider amendments to CON laws that would make it easier to establish emergency care in underserved markets and behavioral health care facilities. According to one report, CON regulation exists in 35 states, and 24 states modified their CON laws during the pandemic.
Housing is Health Care | Health Care Workforce Housing
Demand for affordable housing made the news on several fronts. A number of health care providers across the country noted that staffing issues tied to a lack of affordable housing in certain markets, exacerbating already difficult labor and staffing challenges for hospitals. That prompted several health care providers to undertake their own initiatives to sponsor or develop affordable workforce housing projects. A number of health care insurers also supported or sponsored affordable housing projects to address social determinants of health. In 2022, CareSource, CVS Health and UnitedHealthcare all announced investments in affordable housing. The average life expectancy of an unhoused person in the U.S. is 52.6 years of age compared to 78.6 years for those who have housing. As a result, state Medicaid programs are looking for ways to cover rent and security deposits for their unhoused populations. North Carolina’s Healthy Opportunities Pilot Program (Medicaid 1115 Waivers) is one to watch.
Continued Development of Ambulatory Surgery Centers
Ambulatory surgery centers (“ASCs”) continue to proliferate as insurers and technology allow for more procedures to be performed in an outpatient setting and patients continue to prefer care outside of the inpatient setting in the post-pandemic environment. One report noted that 170 ASCs either opened or were announced in 2022. Several major ASC operators (AmSurg, SCA and USPI) reported double-digit revenue growth in 2022.
Behavioral Health Deal Activity Sets Record | More Innovation Needed
The last year also saw increased behavioral health M&A activity. Although finding operators to staff and manage new facilities remains a challenge. Private equity investors can’t seem to get enough of behavioral health care opportunities as a Modern Healthcare survey highlighted that 70% of health care design firms noted an increase in new, proposed behavioral health care projects. Nevertheless, a number of new inpatient and outpatient behavioral health projects were announced to address the significant need for behavioral health services. In a recent report, 21% of adults experienced mental illness and about 55% of those adults do not seek treatment. Increasing rates of pediatric behavioral health needs also led providers like Children’s Hospital Colorado to implement solutions to increase mental health inpatient, outpatient and day services by more than 50%, and to expand pediatric mental health facilities. And providers are looking at public-private partnerships and greater innovation to meet those growing mental health needs, including the Milwaukee County Mental Health Redesign, which could serve as a national model for a workable public-private behavioral health framework.
Real Estate Investors Pivot to Life Science Assets
Investors flocked to research and development facilities over the past few years and in 2022 a number of traditional health care real estate investors and developers moved quickly into the life science industry. A tremendous amount of capital is on the street for life science assets. Several significant life science projects were announced over the past year, including a $1B project sponsored by Starwood Capital Group and Trinity Capital Advisors involving 109 acres in the Research Triangle and a $1.5B life sciences hub in Manhattan.
Large Hospital Projects Continue to Move Forward
Even with rising construction costs, a surprising number of new hospital projects were announced across the country. According to a mid-year report from Revista, 163 new hospital projects began in 2022 and several of those projects had price tags at or above $1B. The following health systems announced major expansion projects during the past year: Cleveland Clinic (U.S. and U.K.), Cooper University (NJ), Hoag Hospital (CA), JPS Health Network (TX), Kaiser (CA), Mayo Clinic (MN), Roper St. Francis (SC), St. David’s HealthCare (TX), Straub Medical Center (HI), UC Davis Health (CA), UCLA Medical Center (CA), UC San Francisco (CA), UPMC (PA) and several VA Hospitals (MO and NY). Even so, based on the last few weeks’ headlines, the pace of those expansions may slow, as some health systems may postpone new projects that have not come out of the ground based on rising interest rates and negative operating margins.
Senior Housing Had Its Ups and Downs
The senior housing industry benefitted from increased occupancy in 2022 and rent growth in certain markets but staffing challenges and increases in supply chain costs continue to bog down the industry. At the same time, investors sent mixed signals about senior housing investment opportunities. Several regional and national owners went on buying sprees with expectations that demand for assisted living, independent living and memory care will continue to remain strong. On the other hand, financial advisors reported an increased rate of bond defaults by senior housing operators. As a result, lenders underwriting senior housing facilities have either hit pause or tightened underwriting requirements on new loans. Workforce housing shortages also strained the senior housing industry, leading to some operators converting senior independent living units to workforce housing units as a strategy to attract and retain caregivers. What remains consistent is that there is strong demand for affordable senior housing and for senior housing facilities that focus on niche segments (ethnic, religious, cultural or service-driven communities). Another trend is branded senior housing communities like Disney’s Story Living community and Minto’s Latitude Margaritaville communities that continue to experience strong demand.
Skilled Nursing Facilities Continue to Face Headwinds
Skilled nursing facilities (“SNFs”) had another challenging year on several fronts. Early in 2022, a number of states, along with the Biden Administration, pushed for minimum staffing standards with the hope of improving the quality of care at SNFs. Several states also sought legislation that would require SNFs to allocate a certain percentage of profits toward patient care and staffing. At the same time, SNFs struggled to recruit and retain staff with four out of five SNF operators reporting staffing shortages. Reports from across the country noted that burnout and better opportunities caused SNF employees to look for employment in other industries. In some markets, nurses and nursing assistants could make more money working in fast food restaurants when compared to working at SNFs. Market conditions created mixed results for operators. Ensign Services continued to buy up SNFs across the country, while ProMedica announced plans to exit its SNF joint venture with Welltower.
Real Estate Investors Seek Health Care Real Estate and Joint Venture Opportunities
Real estate investors and investment funds continue to seek out health care investment opportunities. In a recent CBRE investor survey, investors allocated 57% more capital to health care real estate assets in 2022 as compared with 2021. With investors like that, the health care real estate is pandemic- and recession-resistant. Supporting this thesis is data indicating that 95% to 97% of MOB tenants paid rent during the height of the pandemic. Another report noted that MOB loan default rates are roughly 0.5%. For comparison purposes, hotel loan defaults at the same time were around 20%. Another trend was the formation of joint venture (“JV”) relationships between investment funds and well-known health care real estate developers. For example, Artemis Real Estate Partners and Thomas Park Investments formed a $500M JV to acquire medical office buildings.
If you have questions or would like additional information about our health care real estate legal and advisory services, please contact:
- Danielle Bergner at dbergner@hallrender.com or (414) 721-0913;
- Andrew Dick at adick@hallrender.com or (317) 977-1491;
- Joel Swider at jswider@hallrender.com or (317) 429-3638;
- John Marshall at jmarshall@hallrenderas.com or (317) 670-8527;
- Addison Bradford at abradford@hallrender.com or (317) 977-1403; or
- Rene Larkin at rlarkin@hallrender.com or (720) 282-2024; or
- Your primary Hall Render contact.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot give legal advice outside of an attorney-client relationship.
