Why Medical Offices Will Flourish After the Pandemic

Before the pandemic, there was the perception that healthcare was recession-proof and that demand for medical space will rise no matter what happened to the rest of the economy. COVID-19 upended that assumption, but a new report from Cushman & Wakefield makes the case that this commercial real estate sector will be resilient in the long run, fueled by the same demographic factors that existed before the novel coronavirus rolled through the US.

“According to the Centers for Medicare and Medicaid Services, between 2020 and 2027, healthcare spending is projected to increase by $1.9 trillion in the US alone,” the report says.

Like every other segment of the economy, healthcare crashed in the Spring. Consumer spending on healthcare dropped at a -54% annual rate, causing a sharp decline in healthcare providers’ revenue. That caused a nearly 10% decline in employment, which was a record for the sector, according to C&W.

The jobs shed from those practices represented 54% of all the healthcare jobs lost in the recession even though they account for only 23% of healthcare jobs, according to C&W. Not surprisingly, sectors more directly tied to COVID-19 treatment saw smaller declines. Outpatient experienced -8.1% declines, while home healthcare and hospitals posted -7.0% and -2.3% drops, respectively.

Since Q2, healthcare has recovered. By October, employment recovered in the offices of dentists (95.3%) and doctors (75.7%), as well as for most outpatient care jobs (87.9%).

It should be noted, though, that even with this recovery, healthcare employment remains below its pre-recession level as patients remain cautious about visiting doctors. As of October, 63% of healthcare jobs lost have been recovered, compared to 54% of all US jobs.

While consumer spending bounced back strongly in Q3 (+94%), it remains 7.0% below the level at the end of 2019.

A Demographics-Fueled Surge

C&W thinks healthcare will be vital in the long run, driven by fast growth in the 65 and overpopulation. That should drive demand for medical services at the fastest rate in history. •

From 2010 to 2019, the 65 and over cohort in the US increased by 1.4 million people per year. That growth will accelerate to 1.7 million per year over the next 10 years, which should be the fastest increase for that age group in history, according to C&W.

From 2010 to 2019, healthcare spending increased by $136 billion per year. From 2019 to 2027, that rate should nearly double to approximately $268 billion per year, according to The Centers for Medicare and Medicaid Services (CMS).

Others also see strong potential in the sector, which should boost medical offices.

Randy Blankstein, president of The Boulder Group, told GlobeSt.com in an earlier interview that he expects the single tenant net lease medical sector to remain active as investors are attracted to the healthcare sector’s long-term outlook and the increased need for conveniently located healthcare. The number of aging baby boomers, combined with the fact that medical space is e-commerce resistant, is a big part of this appeal.

“Between flu shots, COVID tests and COVID vaccines, there won’t be a shortage of this kind of space,” Blankstein says. “There is also a large ramping up of urgent cares as people realize there’s a huge cost saving between going to a hospital and going to an urgent care.”