Key Takeaways
• Rising labor costs and tight overall labor market putting operational pressures on healthcare sector.
• Higher interest rates are limiting new expansions.
• Supply chain issues and long lead times continue to affect healthcare projects.
• Higher annual increases. Is 3% the new normal?
Q4 2022
The nursing strike in the second half of 2022 has been resolved, but the fallout continues to add significant pressures on health systems as they grapple with both rising labor costs and a tight labor market. The uncertainty with interest rates and continued supply chain bottlenecks will likely pause new projects until the second half of the year.
Historical Absorption, Deliveries and Vacancy Rates
* In thousands
An overall re-assessment of the buildings in the market set created an inventory change greater than new supply delivered.
Lease Transactions
Market Pulse
Q4 2022
Healthcare Facing Staffing Issues
Staff shortages and recent pay increases are at a crisislevel with turnover at an all-time high. While the pandemic heightened the scale of the problem, understaffing is a structural issue that has dogged the healthcare sector for several years. For some hospitals, fewer workers mean that fewer beds are available for patients. Insufficient staffing creates bottlenecks in outpatient and acute-care facilities, resulting in increased wait times. In some instances, hospitals have been forced to divert patients to other campuses altogether.
The needs of healthcare workers have shifted as well with a focus on flexible work hours. Those systems that are able to adapt to the new worker paradigm will have the best success.
What’s Causing the Exodus?
Why are healthcare workers leaving the industry on such a large scale? In an October 2021 survey, Morning Consult cited 13 reasons healthcare workers quit. The top five reasons (in descending order) were:
• The COVID-19 pandemic
• Wanting higher salaries or better benefits
• Found a better opportunity
• Burned out or overworked
• Wanting more career growth
In addition to the changing work requirements, demographic trends are also impacting the workforce. Nearly 50% of all physicians are 55 years or older, however that varies by specialty. While not all are set to retire, with some working longer due to economic necessity, there is a shortfall between those leaving and entering the healthcare industry.
Year-Over-Year Employment Change
Vacancy
Vacancy rates have returned to pre-pandemic rates with many of the previously vacant suites being backfilled with independent healthcare groups expanding. The medical market is the one thriving market as general office and retail have seen soaring vacancy rates over the past year. This may put pressures on healthcare providers to look to traditional office and retail options as traditional medical office buiding options tighten. Multi-tenant vacancy rates have remained below 10% for the last four quarters, having fallen 1.08% in the last half.
On hospital campus vacancies continue to vary dramatically between hospital campuses but overall remain very tight with average vacancy remaining around 6%.
Absorption and Leasing
Market leasing for the second half of 2022 was strong across the market especially in class A & B multi-Tenant properties. Inflationary cost pressures and delays in higher reimbursements may slow this trend for the coming year. The overall outlook is much more conservative than past years.
On-campus leasing has been slower with fewer vacant spaces available on most campuses. Many groups have renewed their spaces for longer durations, limiting options. Future on-hospital campus buildings are in early planning phases but will be several years before delivering.
Source: Colliers, Costar
Local Investment Trends
Medical office buildings remain one of the most active products but saw a dramatic drop off in the second half of 2022. Many of the transactions that were completed had been under contract earlier in the year prior to the run up of interest rates. Many large REIT’s, pension funds and lending institutions stopped all new transactions with only the very best core assets trading hands. Several large lending institutions have changed criteria by decreasing the loan-to-value and increasing personal and corporate guarantees even for the most stable properties. With the uncertainty in the debt markets and tightening requirements, pricing has seen a dramatic change. CAP rates have increased well over 100 basis points in the past six months. With buyers needing higher returns and sellers seeing lower values, we anticipate fewer transactions in 2023.
Source: Colliers, Costar
Source: Colliers, Costar
Rental Rates
As leasing has remained strong in the Class A & B multi-tenant market, fewer options, inflationary pressures and rising interest rates have pushed asking rents higher. This is especially true for the on-campus market. Owners have pushed asking rates up higher than we have seen in years, most notably in the annual rent escalations. Annual rent increases of 2% to 2.75% have been the norm for the past five years, but now most new leases have 3% or higher rental increase factors. This can be challenging for medical tenants that have traditionally signed long-term deals.
The difference in rent between newer construction properties and second-generation space has never been higher. Newly constructed medical properties are now asking north of $30 net consistently for the first time in this market.
Overall Rents (NNN) for New and Old Buildings
Construction
Several new construction projects are underway or recently completed with projected occupancy for later this year. Most, if not all of these projects had been planned and financed months ago, prior to the aggressive changes in the debt market. Several planned projects for 2023 have been put on hold until more economic and debt market certainty or higher pre-leasing thresholds can be accomplished.
Supply chain issues and long lead times remain a major obstacle for both new construction and building renovations. This is especially noticeable in electrical switch gears, HVAC units and back up power systems. Many groups were forced to pre-order equipment that can run 30 - 60 weeks for delivery, prior to signing leases or having firm commitments just to make the required timelines.
New Supply Delivered and Under Construction (UC)
Medical Office Building Construction Sites
