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Healthcare Market Not Immune to Economic Malaise

February 25, 2009

By Ted Smalley Bowen

Cranes are still busy over Boston’s medical districts. But the city’s healthcare construction boom, which in the past five years has seen over a million square feet of new projects completed and more than 2 million square feet approved or under construction, is subsiding.

Dallas-based HKS recently won a contract to design a 160-bed hospital in Abu Dhabi.
Image courtesy HKS
There is still demand for healthcare facilities in the Middle East. Dallas-based HKS recently won a contract to design a 160-bed hospital in Abu Dhabi.
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“We’re seeing institutions taking a step back,” says Sonal Gandhi, senior manager for institutional development at the Boston Redevelopment Authority. “They’re looking at how they can optimize the space they have.”

A similar scenario is playing out nationwide as the recession intensifies. Compared to other building sectors, the healthcare industry has been a less anemic consumer of architectural services, but it is hardly immune to the economic malaise. Fund-raising is down, bond markets are faltering, credit remains elusive, and government spending is being slashed. Institutions are wary of breaking ground before lining up funds, and banks are pressing commercial developers for committed tenants.

Over half of the respondents to a recent survey by the American Hospital Association said they were reconsidering or delaying renovations or expansions. Even California’s healthcare industry, which as of last September was expected to spend $100 billion in construction over the next decade, is stumbling. Nearly 40 percent of the hospitals that responded to a November survey conducted by the California Hospital Association expect to miss state-mandated deadlines for seismic retrofits.   

“Following a record level of construction in 2008, for 2009 we're looking at a moderate pullback," says Robert Murray, vice president of economic affairs for McGraw-Hill Construction. Last year in the U.S., construction began on healthcare projects totaling 110.2 million square feet, valued at $30.5 billion. It was the fourth consecutive year that healthcare construction totaled more than 100 million square feet.

For 2009, total square footage is expected to drop 12 percent, to 97 million square feet, according to Murray. A further 5 percent drop is expected for 2010.

Design firms anticipate fewer contracts for new construction and large-scale renovations, but those with an international reach and diverse services are better positioned to ride out the recession, says Chuck Siconolfi, director of HOK's healthcare division and founding member of the American College of HealthCare Architects. In prior recessions, he says, firms were “less able to hedge with international work.”  

The Middle East, South Asia, India, and China should maintain some demand, Siconolfi says. Indeed, Dallas-based HKS recently won a contract to design a 160-bed hospital for the Um Danat Al-Emarat development in Abu Dhabi, United Arab Emirates. But conditions in neighboring Dubai, whose economy has soured, underscore the uncertainty in emerging markets.

Here in the U.S., firms might still find work consulting on space requirements associated with new trends, Siconolfi says. Hospitals are increasingly performing clinical trials, which may entail the creation of specialized outpatient and data management facilities. They also are organizing along disease lines, rather than around traditional departments, focusing on a continuum of care and related lifestyle and family issues. “We're also advising clients on getting better patient outcomes with a smaller footprint,” Siconolfi says. “And there's a growing appreciation on everyone's part that hospitals need to be better looking and more humane.”

The federal economic stimulus package could also provide a shot in the arm for the healthcare sector. The legislation directs billions toward the construction or renovation of healthcare and research facilities owned by agencies such as the National Institutes of Health and Department of Veterans Affairs. Architects say they are optimistic. “We haven't made any formal conclusions, but I think it's going to be a positive," says Jocelyn Frederick, a principal at Perkins + Will. “Personally, I think the issue is to seal commitments for long-term infrastructure and research projects that are good for the community.”

Read more economic news in our Recession and Recovery special section.

 

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