Houston Healthcare Market Report

Mid-Year 2017 | Houston Healthcare | Market Report

Lisa Bridges Director of Market Research Colliers | Houston
Healthcare Trends commentary by Beth Young

When writing about the healthcare-property market in the greater Houston area, the first thing we must acknowledge is that Houston is home to the Texas Medical Center (“TMC”), the world’s largest medical center and the eighth largest business district in the U.S. With that comes 50 million developed square feet in the TMC alone, plus additional hospitals and outpatient centers spread throughout the far-reaching suburbs that cater to nearly seven million people (as of last year). Currently the TMC is reporting $3 billion in construction projects underway within their boundaries. The following information focuses on a few of the high points in the suburbs of Houston’s healthcare property market.

SUBLEASE AND DIRECT LEASE SPACE

Houston currently has a near-record amount of sublease office space available, and the sub-type of healthcare properties (including office buildings with some medical suites) has not escaped that trend. Vacant sublease space in healthcare buildings has increased from 98,647 square feet to 113,217 square feet since the first quarter of 2017. However, the amount that is available and yet still occupied, equals almost twice as much sublease space. Total medical office vacancy (including direct space) has increased from 10.9% at the end of 2016 to 12% according to CoStar, a national database of commercial real estate.

Interestingly, the gross lease rate for direct medical-office space and sublease space for medical office property is within two cents of each other across the city, at an average of $25.28 per square foot per year. Knowing landlords can offer multiple incentives (free rent, construction allowance, parking options, flexible terms, etc.) to prospects, medical tenants who need to sublease their current office space may want to consider lowering the asking rent to compete with landlords for available prospects.

Houston Healthcare Market Report Mid-Year 2017

Houston Class A Medical Office Rents & Vacancy

HOUSTON HEALTHCARE DEVELOPMENT

Despite the recent increase in healthcare properties’ vacancy, demand for new medical-office space has resulted in four properties being delivered in the first quarter, and five more delivered in the second quarter of this year. Currently, there are 11 more medical-office projects outside of the Texas Medical Center, adding up to 542,224 square foot currently under construction.

TierOne Development is building a speculative 38,600-square-foot project in Sugar Land, along Highway 59 South/I-69, centrally located between major hospitals. Completion is expected in the second quarter of 2018.

Memorial Medical Pavilion, a new five-story, 101,744 square foot medical office building with first-floor retail tenants and a freestanding parking garage in the Memorial Villages area is scheduled to break ground in December and open in the first quarter of 2019.

Medistar is working on their 70,000 square foot Integrated Medical Plaza in Webster. The Bay Area Regional Medical Center is finishing floors six through nine for a total square footage of 373,000 and 200 beds at an estimated investment of $300 million.

Some additional healthcare construction in Houston includes plans by major health and hospital systems to position themselves closer to patients’ residences. In March, after an accelerated 24-month construction period, Memorial Hermann, the largest health system in the Houston area, opened a new $168 million hospital in the northwest suburb of Cypress to address the fast-growing community’s health care needs from routine outpatient visits to inpatient procedures. The health system also recently started on a $70 million, 123,000-square-foot, expansion to its Northeast Hospital’s campus in Humble, TX. The five-story building is expected to open in December 2018. The campus currently houses more than 250 patient beds and is adding 90 new patient rooms. In addition, a second four-story medical office building in Pearland at 10907 Memorial Hermann Drive and Highway 288 near the new hospital is expected to open by September, and a 173,000 square foot Medical Plaza will open in November in The Woodlands.

Texas Children’s Hospital, which was recently ranked by U.S. News & World Report as fourth in the country among the nearly 200 pediatric centers, opened a new 548,000 square foot facility in The Woodlands with 24 emergency rooms, and 30 acute-care beds. The system has plans to open more than two dozen new facilities including a 24 acute-care bed expansion on their campus in the suburb of Katy. U.S News & World Report also named Houston Methodist Hospital top hospital in Texas.

The Methodist Hospital’s new 470,000-square-foot Woodlands hospital opened in July with 193 beds. In addition to building a 160,000-square-foot medical building in The Woodlands, they are also expanding in Katy with a new $170 million, six-story, 228,700- square-foot hospital tower next to its West Campus facility. The health system continues to grow and needs more office space near the TMC, evidenced by a recent lease of 24,282 square feet of office space at the Museum Medical Tower. (They are also currently expanding with a new 390-bed patient tower in the TMC.)

The University of Texas MD Anderson Cancer Center is building a new $113.75 million outpatient center in Katy with a planned opening in 2018. The new 175,000 square foot facility will be their first free-standing clinical building constructed outside of the TMC. The new center is the first phase of a long-term plan to develop facilities on its 34.5 acre campus near I-10 and Dairy Ashford.

CHI St. Luke’s Health will be the first tenant at Vivacity, a 186-acre medical district in New Caney at the intersection of Highway 59 and the Grand Parkway. The hospital system is still determining what size and scope of facility it will build in Vivacity. The medical district is being developed as part of the master-planned community Valley Ranch by The Woodlands-based real estate business the Signorelli Company. Vivacity will feature more than 2.5 million square feet of space, including a hospital and wellness and life science facilities.

HOUSTON HEALTHCARE INVESTMENT TRANSACTIONS

Most healthcare real estate investors are primarily interested in pursuing medical office buildings (“MOB”) this year. Advantages over non-medical office buildings include higher occupancies, lower tenant turnover and longer term leases. A steadily aging population creates demand for healthcare professionals and the properties they occupy. Investors see the sector as a safer place for their capital. Unfortunately for buyers, few owners of these property types have been quick to offer the properties for sale this year.

Ambulatory surgery centers are the second most desirable medical property sought by investors. Several surgical properties closed in Houston recently. The 34,600 square foot Houston Hospital for Specialized Surgery at 5445 La Branch Street, and the 37,000 square foot ambulatory surgery center at 8111 Southwest Freeway were purchased by an affiliate of Inland Real Estate Acquisitions, Inc. In June, the 100 percent-occupied South Shore Surgicenter in the suburb of League City was sold to an out-of-state private investor who specializes in the property type.

REITs and health systems have been active this year. Inland RE Group, a private REIT, closed on Memorial Hermann Acute Care Center at 1431 Studemont Street. It is a 100% occupied, 44,000 square foot single-tenant property. HCA Holdings Inc., the largest for-profit healthcare provider in the U.S., purchased three Houston hospitals from Tenet Healthcare Corp. for an estimated $725 million in net proceeds. That transaction included the 423-bed Houston Northwest Medical Center, the 181-bed Cypress Fairbanks Medical Center Hospital and the 444-bed Park Plaza Hospital. HCA also committed to purchase two more hospitals from Community Health Systems including one in the northwest Houston area, the Tomball Regional Medical Center, a 350-bed hospital.

Private investors still hold the top spot nationally for being most active in the healthcare-property arena. Following are some recent purchases by private investors:

  • RoseRock purchased 8619 Broadway, a 19,760 square foot property in the south suburb of Pearland.
  • Everest Medical Core Properties bought a medical office portfolio which included the UT Physicians 42,301 square foot building at 1517 Thompson Road in Richmond; the Memorial Hermann Surgical Hospital at 16902 Southwest Freeway; the Physicians Pavilion at 16906 Southwest Freeway; and the UT Physicians facility at 15035 SW Freeway, from Dr. Juliet Breeze, the developer of Next Level Urgent Care properties.

2017 Houston Medical Office Building Sales (Mid-Year)

Houston Healthcare Market Report Mid-Year 2017

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