Over the past few years, the construction industry has been hit with a flurry of steep price increases in material costs. This is expected to continue, but the healthcare construction market has flourished of late and looks to continue that trend. HEALTHCARE DESIGN Managing Editor Todd Hutlock spoke with Ken Simonson, chief economist for The Associated General Contractors of America (AGC), providing a closer look at where the healthcare construction stands and where it appears to be going in the near future.

Can you provide a general overview of how the healthcare construction market has fared recently?

It's been excellent. Hospital construction in particular has been extremely strong in 2006, and I think it has plenty of momentum left. The market for medical office buildings (MOBs) and clinics has been more erratic. The prospects there remain uncertain.

To what do you attribute the erratic market for MOBs and clinics?

I think there are cross-cutting patterns there. Employers, government agencies, and consumers certainly have put forth an ongoing effort to rein in their healthcare costs. At the same time, there is growing interest from consumers in discretionary types of healthcare—cosmetic, fitness, weight control, and so forth—so you tend to see fads and spurts in these different kinds of clinical and ancillary healthcare activities.

The other reason the clinic and MOB market may be more volatile in terms of new construction activity is that theses types of facilities can make use of multipurpose buildings. For example, clinics can pop up in strip shopping centers or other multiuse buildings, and medical office facilities can be fitted into general purpose office buildings, so construction of these types of facilities tends to fluctuate with general retail or office construction. It isn't as much of a custom-build situation.

Have you seen evidence showing that higher material costs have affected the healthcare market?

It is very common these days to have to go back to the designer and use those words hated by most contractors—“value engineering”—to squeeze out some of the costs, decide which things are optional, or what can be done in phases to make the initial cost fit the budget. This is a fairly typical occurrence—probably much more so today than five years ago when material costs were staying level or even delivering pleasant surprises from time to time.

Are there specific regions in the United States that show better-than-average or worse-than-average results in terms of healthcare construction volume?

In terms of material costs, most prices are changing at similar rates nationally. There are local differences at the absolute price level, which reflects mainly transportation cost differences. For instance, if you are buying cement and the site is three miles away from the plant, your cost will be much lower than if you are 300 miles away because transport costs for something that is dense and of low value represent a significant fraction of the final price. I don't know of any particular regions where material costs are going up much more than in other areas.

Certainly there is a lot more capacity for growth in certain areas around the country compared to others. Idaho and Utah, for example, have been increasing their construction at phenomenal rates—they've been reporting increases in construction employment of as much as 15% per year.

How has the long-term care construction market looked of late?

What I've been hearing is that there is a huge demand for independent living facilities right now rather than the healthcare-intensive side. Investors and developers seem to have overestimated the demand for assisted living and skilled nursing facilities. We are getting a large percentage increase in the senior population, but that population is remaining fit longer than these investors and developers might have imagined, and these seniors certainly value the opportunity to live independently, as well. For the moment, the strongest demand for senior living is the type of facility where there are still individual living units, but they may have group eating areas or on-site medical facilities—not around-the-clock skilled care facilities. I don't have data to back the fact that the demand for assisted living and skilled nursing was overestimated, but it is certainly my impression. I think that trend toward independent living will continue over the next decade as the baby boomers reach age 65.

What's the outlook for healthcare construction in the future?

Hospital construction, which was up 25% during the first 11 months of 2006 compared to the first 11 months of 2005, will again see growth in 2007 in the neighborhood of 10 to 20%, which is very strong construction growth. Going farther into the future, the demographics would suggest that there would be continuing demand for hospital construction, at a greater rate than construction overall, and that would probably hold true for healthcare construction in general. The hospital market is really playing catch-up right now with the huge technologic changes that have affected everything from patient intake to diagnosis to operating procedures to recovery.

I see years of growth ahead in the hospital market because those projects take a long time—there's permitting, accreditation and state hospital approval boards, fund-raising and, of course, the construction itself, which may be fairly complicated. Now that hospital construction is on an upswing, and changes in both demographics and technology are ongoing, I think we're in for a long period of hospital construction expansion. To cite one example, Kaiser Permanente has a 10-year plan that looks to hold a sustained high level of hospital construction for the next decade.

As I mentioned, there is greater volatility in the clinic and MOB market, however. To use one example, you can open a lot of weight-loss centers of a specific brand, but if the public loses interest in that particular brand, they move on to some other diet technique and a new group of weight-loss centers are constructed.

Manufacturing construction is another area that is hard to predict. While the manufacturing sector as a whole is on an upswing as far as construction goes, I think that for an individual pharmaceutical or medical device company, the market will always be subject to regulatory issues or consumer demand for a product. At the company-specific level, you will see much wider swings in construction levels than you will for the healthcare sector as a whole. HD

Ken Simonson is Chief Economist for The Associated General Contractors of America (AGC), the largest and oldest national construction trade association in the United States. Located in Arlington, Virginia, AGC represents more than 32,000 firms, including 7,000 of America's leading general contractors, and more than 11,000 specialty-contracting firms.