The Healthcare Sector: Recovering, Revitalized and Resilient
In March 2020, the U.S. Department of Health and Human Services (HHS) took the extraordinary measure of requiring that all elective procedures, nationwide, be suspended so that healthcare providers could more readily focus on and treat COVID-19 patients and their emergent health conditions. As a result of the steep decline in elective procedures, both healthcare employment and spending saw their largest drops in nearly 30 years, contributing significantly to the U.S. GDP collapse.
Healthcare spending fell at a 16.2% annual rate or by $97.6 billion in Q1 2020 and then an additional 54.1% or $383 billion in Q2 2020. By far the biggest decline in healthcare spending history, it represented 30% of the entire decline in consumer spending during the first half of 2020.
Once the HHS order was lifted, procedures slowly returned and, by the end of 2020, had nearly recovered, reaching volumes just 6% below 2019 levels. Nonetheless, the cumulative effect across all specialties was a substantial decline in visits for the year.
Spending and employment rebounding
As the U.S. economy rebounded from Q3 2020 to Q2 2021, so did spending on healthcare and healthcare employment. By Q2 2021, total consumer spending had fully recovered to pre-pandemic levels, and healthcare was once again a major contributor to the recovery. Not surprisingly, outpatient spending recovered more rapidly than spending on hospital and nursing home services.
Employment trends have mirrored the spending data. Total healthcare employment fell by 1.6 million during the recession. Since April 2020, employment has increased by roughly 1.1 million, leaving a shortfall of 513,000 jobs.
Strong appetite for medical office buildings
Despite the many challenges that COVID-19 brought to bear on healthcare providers, including the temporary suspension of outpatient procedures, medical offices across geographies performed well as a real estate asset class.
Medical office rents held steady or saw modest growth in most markets. Limited medical office supply coupled with steady demand helped to ensure strong rent performance. Class A medical office performed particularly well throughout the pandemic and has continued to see demand as healthcare volumes have returned. Most publicly traded healthcare REITS reported 2 to 3% effective rent growth in 2020.
Because of the resilience of medical office properties throughout 2020, the appetite for medical office deals has remained strong. Looking forward, we expect capital market activity to increase through year-end above and beyond typical seasonality.
Senior Housing sector continues to struggle
Senior housing as a sector—and consequently its unit absorption—struggled significantly as a result of COVID-19. In the early days of the pandemic, senior housing experienced high infection rates, as their patient populations were among the most susceptible to the virus. All types of senior housing—independent living, assisted living, skilled nursing, and CCRCs—have seen a decline in occupancy since the start of the pandemic, though occupancy levels across asset types are improving with widespread resident vaccination.
Unit absorption turned sharply negative in the senior housing space as a result of the pandemic. The impact was felt across property types, though it was most pronounced in the higher acuity formats, namely Assisted Living and Nursing care.
With the exception of a handful of large transactions, investment sales volume has remained considerably off the pre-pandemic pace. The first quarter of 2021 was extremely slow with very little in broadly marketed opportunities. Since the start of the second quarter 2021, the sector has seen a significant uptick in opportunities coming to market.
Healthcare property positioned to generate healthy long-term returns
As healthcare providers continue to adapt their facilities and footprints to address the operating requirements of the pandemic, we expect this real estate sector to continue to perform well. While some providers experiencing renewed surges of COVID-19 have halted elective cases temporarily to ensure patient safety, these have been limited in both geographical location and duration.
And although telehealth has enjoyed a recent surge in popularity, at this juncture, widespread adoption and use of telehealth has not altered substantially demand for medical office space. While the early months of the pandemic saw record rates of telehealth use, those rates have since subsided. Long term, we will track continued use of and watch for regulatory changes related to telehealth reimbursement that may affect future demand for MOB space.
The healthcare sector may have experienced significant challenges and stress at the inception of the pandemic, but not only has it recovered and rebounded well, its overall outlook appears very good for the long term. Aging population trends across the world combined with advances in technology should open up tremendous opportunities for the sector overall, while continuing to provide healthy returns for its investors.