Houston’s aging population creates demand for healthcare professionals and the properties they occupy
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. Additional information about TMC can be found on pages 3-4 of this report. The following information focuses on a few of the high points in the suburbs of Houston’s healthcareproperty 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.
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.
Class A Rents & Vacancy
Class B Rents & Vacancy
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:
- 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.
- Fercan E. Kalkan bought 11929 W. Airport Blvd in the southwest suburb of Stafford, also known as the Oasis Professional Building, is 206,474 square feet and nine stories.
- RoseRock purchased 8619 Broadway, a 19,760 square foot property in the south suburb of Pearland.
TEXAS MEDICAL CENTER
The Texas Medical Center (TMC) – the world’s largest medical center – represents one of Houston’s major economic drivers and core industries with an estimated regional annual economic impact of $35 billion. TMC is also one of Houston’s largest employers with more than 106,000 employees, including physicians, scientists, researchers and other advanced degree professionals in the life sciences.
The internationally-renowned, 1,345-acre TMC is the world’s largest medical complex of member institutions, including leading medical, academic and research institutions, all of which are non-profit and dedicated to the highest standards of research, education and patient and preventive care. Over 50,000 students – including more than 20,000 international students – are affiliated with TMC, including high school, college and health profession graduate programs. More than 8.0 million patients visit TMC each year, including approximately 16,000 international patient visits.
In addition to the medical facilities and institutions of higher learning, TMC is also home to more than 290 professional buildings. Overall, the complex covers over 18 miles of public and private streets and roadways, with 50 million square feet of existing patient, education and research space. TMC has continued to grow and expand over the past several decades with the majority of growth occurring in the past ten years. The Center is located in the 110-acre University of Texas Research Park, a joint effort between the University of Texas Health Science Center, M.D. Anderson and General Electric Healthcare. TMC spends billions of dollars on research and charity care annually.
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Houston MSA Health Care 128 Hospitals |
Texas Medical Center World's Largest Medical Complex (1,300 Acres) |
TEXAS MEDICAL CENTER MEMBER INSTITUTIONS
| Baylor College of Medicine CHI St. Luke’s Health Children’s Memorial Hermann City of Houston Department of Health and Human Services Coleman HCC College for Health Services DePelchin Children’s Center Gulf Coast Regional Blood Center Harris County Institute of Forensic Sciences Harris County Medical Society Harris County Public Health and Environmental Services Harris Health System Health Science Center Texas A&M University Houston Academy of Medicine Houston Hospice Houston Methodist Institute for Spirituality and Health LIfeGift MD Anderson Cancer Center - World's Largest Cancer Hospital Memorial Hermann Menninger Clinic Michael E. Debakey High School for Health Professions Michael E. Debakey Veterans Affairs Medical Center |
Nora’s Home Prairie View A&M University Rice University Ronald McDonald House Houston Sabin Vaccine Institute Shriners Hospital for Children – Galveston Shriners Hospital for Children – Houston St. Dominic Village Texas Children’s Hospital - Largest U.S. Children's Hospital Texas Heart Institute Texas Medical Center Hospital Laundry Cooperative Association Texas Medical Center YMCA Texas Southern University Texas Women’s University The Health Museum: John P. McGovern Museum of Health and Medical Science The Texas Medical Center Library Thermal Energy Corporation (TECO) TIRR Memorial Hermann University of Houston University of St. Thomas UT Health UTMB Health |
