Houston’s healthcare real estate market recorded another year of growth
Commentary by Beth H. Young, CCIM, LEED AP
Houston’s healthcare real estate market recorded another year of growth and interest from tenants, investors and developers of medical-use properties. Increasing demand for healthcare properties is brought on by aging demographics. Some of the fastest-growing types of medical properties in Houston include hospitals, medical office buildings (MOBs), surgery centers, imaging centers, urgent care facilities, rehabilitation facilities, behavioral facilities and assisted living properties. With a gain in new medical office building inventory, the total vacancy rate increased from 13.3% in December 2018 to 15.0% in December 2019. However, increased vacant space did not keep gross rental rates down. The average rental rate increased during that time from $24.09 per square foot (“SF”) to $24.57/SF. Sublease rents increased even more, from $25.08/SF to $30.75/SF. The regional population growth is estimated at 7,500 people per month, providing no doubt that medical space is needed and will be filled.
There continues to be strong demand for medical office, particularly in suburban locations, and developer activity is expected to continue for many years. The trend of off-campus medical properties (often in the suburbs) has caught up with the amount of facility space oncampus. In the U.S., both on-campus and off-campus real estate are at 1.5 billion square feet, each with an estimated overall value of about $1.36 trillion.
At the end of 2018, there were 795 medical office buildings (according to CoStar) larger than 10,000 SF in the Houston market. One year later, more than a dozen new MOBs have opened for business. Approximately 70% of MOBs are developed in off-campus locations, often with retail-like characteristics. Two notable new 100%-leased properties include the Mason Creek MOB in Katy anchored by Village Med and Memorial MRI & Diagnostic and Kelsey Seybold’s new 73,000 SF clinic in Cypress. Hedwig Place at 8731 Katy Freeway is 102,474 SF, asking $36.00/NNN and is 72% leased as of the writing of this article. By comparison, the available 50,000 SF Horizon Medical Plaza 2 at 19002 Park Row is quoting $29.00/SF full service and the entire building is available. It is located north of I-10 in a developing area of the Katy submarket.
For the third year in a row, medical office sales in the U.S. topped $11 billion. RCA reported that average cap rates were 6.6%, with an average price per square foot at $301. Cap rates ranged from 5.7% to 8.1%, and 70.4% of the acquisitions were by private investors, followed by 18.5% REIT acquisitions. RCA stated that the Houston market had 26 MOB sales totaling 719,770 SF in 2019. Private investors purchased 59% of the Houston properties paying an average price of $285 per SF with a median cap rate of 6.4%. Pinecroft Realty was the largest buyer of Houston MOBs with the acquisitions of 4500 E. Sam Houston Parkway, a 50,000 SF property and Sugar Land Medical Plaza, a 125,000 SF medical office building. Several surgery centers, dialysis centers and smaller MOBs filled out the 24 sales recorded by RCA. There is no lack of interest from investors, but there are few medical properties for sale in the local market. The healthcare sector is still expanding compared to the general office market in Houston. Healthcare properties provide solid fundamentals, and Houston’s demographics continue to provide a strong degree of confidence in investors of medical office acquisitions.
As new hospitals are built, older ones will often be repurposed. Common new uses for these buildings include rehabilitation, behavioral, or assisted living facilities.
Kindred Hospital has announced they will close four leased locations in Houston to consolidate, cut costs and improve profits. Memorial Hermann has announced an expansion of $250M at its Woodlands Medical Center that will add nearly a half-million square feet of new and renovated service areas and 288 new parking spaces. Since HCA’s recent expansion and resulting dominance in the Houston market, HCA Houston Healthcare has added helicopter service called AIRLife that will transport emergency patients to The Woman’s Hospital of Texas on the south side of the Texas Medical Center and HCA Houston Healthcare in Conroe, north of The Woodlands. HCA’s Woman’s Hospital is expanding its campus with an additional 125,000 SF. Houston Methodist, The Woodlands Hospital, started a $240M campus expansion last fall as part of its Phase 2 construction plan that includes a new patient tower with 100 extra beds and an expansion of the emergency center to 45 rooms. The University of Texas MD Anderson Cancer Center opened its newest free-standing facility in The Woodlands to serve communities north of Houston, making it the third outpatient campus to open in 2019. It will also expand its Proton Therapy Center this year from 73,500 SF to 160,000 SF at a cost of $159 million.
Baylor St. Luke’s is preparing to break ground on a 427,000 SF medical office tower with an 8-story parking garage valued at $109 million at McNair Campus. It will be a 12-story project as part of a joint venture with CHI St. Luke’s in the Texas Medical Center (“TMC”), where more than 106,000 employees work across 50 million square feet of space. There are $3 billion worth of construction projects underway in the TMC, the major employment hub in Houston. The healthcare joint venture said in 2016 that the McNair Campus would eventually encompass $1.1 billion worth of capital improvements. The new development is adjacent to the future TMC3, the proposed 37-acre biomedical research campus with multiple buildings and parks designed to be shaped like a DNA strand.
About 5,000,000 square feet of office space is under construction in the Texas Medical Center area, which has a vacancy rate of 6.1%, one of the lowest rates among markets in the greater Houston area, according to CoStar analysts.
Urgent Care Centers (UCC’s)
In the past five years across the U.S., the opening of urgent care centers (“UCC”) has increased by approximately 10% per year. The greater Houston area rates at the top of the statistics for UCC openings and success. An outstanding example is Next Level Urgent Care, with a growth rate of over 25% every year since opening. The company has 15 locations with another under development which is scheduled to open this summer in Baytown, and an additional three to four more locations planned to open within the next 18-20 months. In addition, they have six onsite clinic locations that are built and owned by organizations for use by their own employees. These regional school districts, including Fort Bend County, Brazoria County, Montgomery County, Houston Independent School District and Goose Creek Independent School District, have benefitted from this recipe for employee healthcare and success.
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 $25 billion. TMC is also one of Houston’s largest employers with 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 preventive care. Over 50,000 students, including more than 20,000 international students, are affiliated with TMC, including college and health profession graduate programs. More than 10 million patients visit TMC each year, including approximately 16,000 international patient visits.
Overall, the complex covers over 18 miles of public and private streets and roadways, with 50M SF 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.
Texas Medical Center
> World’s Largest Medical Complex (1,345 Acres & 50M Developed SF)
> 8th Largest Business District in the U.S.
> 106,000 Employees
> 10M Patients Annually
> 9,200 Patient Beds
> 180,000+ Annual Surgeries
> 13,600+ Annual Heart Surgeries
Houston MSA Health Care
> 128 Hospitals
> 9,200 Patient Beds
> 16,070 Licensed Physicians
> 336,600 Health Care & Social Assistance jobs
> 2.4% Annual Employment Growth between 2017-2018
Houston Healthcare Industry