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Vital Signs 2023

Healthcare Sector Outlook

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Healthcare sector outlook covering key themes that impact healthcare systems, owners and operators.

This time last year, major topics included the budgetary pressures on healthcare systems, the tight labor market and moving beyond pandemic recovery. Now, we face greater challenges and seek solutions for a healthcare system that continues to face labor constraints and as healthcare assets face restrictive equity and debt in the capital markets landscape. Long-existing challenges with labor shortages and costs continue to plague the sector, with inflation, short staffing, long hours and contract labor driving healthcare unions to push for new agreements. While talent continues to flow into the sector, particularly as nursing and physician assistant roles grow in popularity, labor will be a continual challenge for the sector in the medium term.

Labor Pools Growing to Address Labor Challenges 

Healthcare systems are grappling with ongoing labor shortages, driven by factors such as inflation, short staffing, long hours and expensive contract labor. Recently, there is growing availability of talent across healthcare job categories, leading to a more dynamic labor market in the medium term.

 

Revenue Situation Challenged but Improving  

Hospitals experienced negative operating margins last year, with pandemic-era funds expiring, and inflationary pressures and declines in patient revenue. Healthcare systems have taken cost-cutting actions to alleviate some of these budgetary pressures. Meanwhile, the medical office sector continues to have positive NOI growth in the face of rising expenses.  

 

Medical Office Performance Keeping Pace  

With absorption outpacing deliveries, occupancies have risen for quality medical office assets nationally. Rent growth, while tempering somewhat from last year, has continued. In addition, healthcare systems and medical office operators are evaluating underutilized administrative space, as well as distressed offices, for potential conversion to clinical uses.  

 

Like All Asset Classes, Capital Markets Have Slowed  

Limited liquidity and cautious capital have constrained transaction volumes in 2023, mirroring the overall commercial real estate landscape. Significant amounts of capital continue to await better conditions to transact. 

Resilience Through Continued Demographic Tailwinds  

Despite challenges to revenue and capital markets, the healthcare sector remains supported by demographic trends, such as rising healthcare spending nationally and the growing population entering the 65-and-older age cohort.  
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