Many of our clients are weighing whether to renovate inpatient rooms or build new ones. Because the cost of new healthcare construction is alarming – approaching $3.5M/bed post-COVID- they wonder how to create strategic decision points to guide wise investment choices. The first and most important answer is still to build the right size building. Do not overbuild, but also do not miss a market opportunity by underbuilding. (Stay tuned for a future post about underbuilding.)
Except for some regional outliers, most new healthcare construction across the U.S. costs $700-$730 per square foot.
This number:
- applies to both union and non-union work,
- includes base construction before contingencies and escalation,
- includes site development costs (including parking), and,
- includes any site-specific or building-specific variant.
By comparison,
- “gut and rebuild” renovation costs roughly 55% of the cost of new construction
- moderate renovation costs roughly 35% of new construction
Demolition of older buildings continues to be a bargain (and too seldom utilized) at $20-$50/SF.
Any deferred maintenance for infrastructure, exterior envelope upgrades/expenses, or elevator upgrades would add to these costs. The older the building, the more complexity is introduced. But any well-maintained older building with a racetrack design, a 14-18’ wide core, 12.5’ minimum floor-to-floor heights, and adequate vertical circulation should not be overlooked for next-generation patient care.
In this highly volatile healthcare construction market, we believe it is critical to get the most recent pricing information available, even if a project has yet to be completely bought out. Large national construction practices have robust preconstruction teams with a wealth of knowledge on cost resources and comparative program analysis. We find this forward-looking approach superior to historical benchmarks. Also, if you make pricing a marketing exercise, you are likely to get marketing numbers, so find someone you trust and insist on transparency.
It is essential to recognize that construction costs are only 60-65% of a project’s total cost. Contractors are not particularly good at estimating owner costs or contingencies, which should be included in all cost estimates.
As we mentioned above, the most important way to impact construction costs is to start upstream by planning the appropriate building size. This discussion should be strategy-driven and facilities-informed, not facilities-driven and strategy-informed.
To us, a successful strategy-driven plan for inpatient beds considers the following factors:
- Market need: Is your population aging or getting younger? Do your patients need services that are shifting away from the inpatient setting, or do they require higher acuity care?
- Organizational identity: What service offerings are you known for? What do you want to be known for? How will demand for these services change in the next 5-10 years?
- Consumerism: How competitive is the healthcare landscape of your community? Do patients expect private rooms and high-end finishes? Does your facility’s accessibility limit your draw of patients?
- Ambulatory strategy: How advanced is the shift to ambulatory facilities in your community and at your organization? To what degree are major payers in your market moving more risk into value-based contracting?
- Financial targets: What are the key financial metrics that will be used to measure this project’s performance? What is the “hurdle rate” for those metrics?
Inpatient beds are a long-term investment, which demands a long-term perspective on the future of inpatient care in your community.
Facility projects must ensure alignment of expectations among an organization’s Board and key leaders. We strongly recommend that leaders identify the measures of success (including investment limits) most critical to the organization as the first step in any plan requiring a significant capital investment to ensure a truly “strategy-driven” project.
About the Authors
Mark Furgeson is a Senior Managing Director in the Ankura Healthcare Real Estate Strategy group. He helps healthcare providers evaluate and quantify capital investment in their physical footprint to ensure that their investments realize their financial value to the organization today and decades into the future.
Katie Reilley is a Senior Director in the Ankura Healthcare Real Estate Strategy group. She leverages a range of data sources to inform strategic decision-making among executives at healthcare organizations. She performs detailed analyses of service offerings, market opportunities, and their operational implications.
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© Copyright 2024. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
