As of March 2025, non-residential construction costs have increased by as much as 40% since February 2020, following the onset of the COVID-19 pandemic. This rise is driven by a combination of global inflation, high-interest rates, supply chain disruptions, increasing material costs, and shortages of skilled labor.

Healthcare projects face even greater cost pressures due to stringent regulatory requirements, specialized infrastructure, and complex mechanical systems. In many healthcare developments, 35% to 50% of total construction costs are dedicated to mechanical, electrical, and plumbing (MEP) systems — often double that of traditional commercial construction.

The Broad Impact on Stakeholders

The current surge in healthcare construction costs has rippled across the healthcare ecosystem, affecting more than just landlords and tenants. Lenders, construction firms, healthcare providers, insurance companies, and ultimately patients all feel the consequences.

For landlords, rising costs create significant financial risk, particularly in light of labor and material uncertainties associated with specialized healthcare construction. For lenders and investors, high interest rates influence project feasibility, shaping decisions about which developments to pursue.

In addition, healthcare providers may feel the pressure as delayed or more expensive facility expansions can limit patient capacity, slow the introduction of new services, or force difficult trade-offs in operational spending. Ultimately, patients may encounter limited access to care, longer wait times, or increased healthcare costs.

Mitigating Risk in Healthcare Construction

Landlords can manage risk through detailed project planning, cost tracking, and engaging construction management teams to oversee every phase of development. Contractors can protect themselves by locking in prices early, diversifying their supply chains, and taking additional measures to avoid delays.

To address cost pressures, landlords are increasingly negotiating lower tenant improvement allowances and allowing tenants to amortize these costs over the lease term.

During lease negotiations and renewals, tenants benefit from partnering with a knowledgeable brokerage firm. Brokers can identify comparable properties, evaluate options aligned with short- and long-term needs, and strengthen negotiating power. Ultimately, tenant leverage is influenced by both market conditions and the tenant’s financial creditworthiness.

Transparent Communication and Cost Allocation

Ongoing dialogue between landlords and tenants about real-time construction costs is essential. Developers typically establish rental rates as a percentage of these costs. To ensure financial viability, rental rates must be set high enough to generate an appropriate return while accounting for both assessed and unforeseen risks.

Other factors, such as tenant credit, lease term, and expense reimbursement structures, also influence the risk-return balance. Developers must carefully assess whether potential returns justify the associated risks, ensuring the spread between construction costs and expected ROI aligns with market realities.

Navigating the Era of Rising Construction Costs

In today’s environment, both developers and tenants must adapt to a new reality where careful planning, cost transparency, and risk-sharing are no longer optional; they are essential.

As these trends persist, stakeholders who proactively manage construction budgets, engage in collaborative planning, and explore innovative building strategies will be best positioned to deliver high-quality healthcare facilities on time and on budget.