Houston 2Q 2012 Medical Office Report

MIDYEAR 2012 | MEDICAL OFFICECOLLIERS HEALTHCARE SERVICES GROUP - Houston TexasHEALTHCARE MARKET COMMENTARY Houston’s Class A Medical Office Rental Rate Increases by 7.4% in First Half of 2012 Houston Houston’s medical office market at midyear 2012 shows encouraging signs that it has recovered from the downward shift that began in late 2008. On a year-over- COLLIERS INTERNATIONAL | HOUSTON MEDICAL OFFICE | 2ND QUARTER 2010 year basis, medical office vacancy decreased, and the citywide average rental rate and absorption increased. Houston’s medical office market is expected to benefit from both short- and long- term regional trends. Disciplined development, with only 10 new buildings added to HOUSTON MEDICAL OFFICE inventory in 18 months, will relieve the pressure in filling the existing vacant lease MARKET INDICATORS space. It is not surprising that much of the new development activity is occurring Q2 2011 Q2 2012 in outlying suburban areas, particularly in West Houston, Fort Bend County and The CITYWIDE NET Woodlands, where strong population growth trends are projected over the next ABSORPTION (SF) 109k 188k twenty-five years. CITYWIDE AVERAGE VACANCY 12.6% 12.5% Overall, Houston’s economy remains among the strongest in the U.S. The Houston CITYWIDE AVERAGE metropolitan area added 85,000 jobs between June 2011 and June 2012, an RENTAL RATE $22.65 $23.00 increase of 3.3%, and is on track to add the same amount in 2013. Unemployment CLASS A AVERAGE fell to 7.5% from 9.0% one year ago. Houston area home sales increased by RENTAL RATE $28.34 $28.89 23.8% compared to sales one year ago. According to the Texas Workforce CLASS A Commission, Houston’s education and health services sector added the largest AVERAGE VACANCY 11.6% 14.8% number of jobs from June a year ago, up 20,600, with more than two-thirds of the increase occurring in ambulatory health care services. The 6.5% rate of growth in this industry was nearly three times the nationwide average of 2.2%. JOB GROWTH & UNEMPLOYMENT ABSORPTION, NEW SUPPLY & VACANCY RATES (Not Seasonally Adjusted) JUNE JUNE 1,200,000 UNEMPLOYMENT 2011 2012 Absorption New Supply Vacancy 17% 1,000,000 HOUSTON 9.0% 7.5% 15% TEXAS 8.6% 7.6% 800,000 U.S. 9.3% 8.4% 13% 600,000 ANNUAL # OF JOBS 11% JOB GROWTH CHANGE ADDED 400,000 HOUSTON 3.3% 85K 200,000 9% TEXAS 2.2% 231K 1.8M 0 7% U.S. 1.3% -200,000 5% Accelerating success 1

MEDICAL OFFICE & HEALTHCARE MARKET COMMENTARY | MIDYEAR 2012 | COLLIERS INTERNATIONAL HOUSTON TEXAS MEDICAL OFFICE Vacancy & Availability followed by Class B properties posting EXISTING INVENTORY BY CLASS Houston’s medical office occupancy 260,669 SF of positive net absorption. Class B decreased slightly during the first half of The majority of medical tenant move-ins Class A 7,249,904 14,239,726 2012 with the citywide average vacancy during the first half of 2012 were in 54.9% 26.6% rate increasing by 30 basis points (bps) lease spaces under 5,000 SF. Some of to 12.5% from 12.2% at year-end 2011. those tenants include: Associates in By property class, Class B vacancy rates Medicine; Medical Center Ear Nose and posted the only decrease, 70 bps to Throat Associates of Houston; Memorial 11.6% in 2Q 2012, compared to 12.3% in Dentists; Memorial Pediatric Associates; 4Q 2011. In contrast, Class C vacancy New Dimensions Home Healthcare Plus; rates increased 110 bps to 11.7% from Texas Children’s Pediatric Associates; Class C5,265,459 10.6% while Class A vacancy rates and The University of Texas MD 19.3% increased 150 bps to 14.8% from 13.3%. Anderson Cancer Center. Class A Class B Class C Sublease space has not had a significant Rental Rates impact on current vacancy rates, Quoted full-service rental rates for all MEDICAL OFFICE remaining below 1.0% of total vacant NET ABSORPTION BY CLASS medical office property classes space over five years. Of the 3.3M SF averaged $23.00/SF in 2Q 2012, an of vacant space on the market at700,000 increase of 1.6% from the $22.65/SF in Class A Class B Class C midyear 2012, only 70,380 SF was 4Q 2011. Medical office building600,000 sublease space. landlords continued to offer lease500,000 Disciplined medical office development concessions including free rent and activity has helped prevent major generous tenant improvement packages400,000 upheavals in current occupancy levels. to attract and retain credit worthy There were only seven (7) new tenants.300,000 buildings (152,108 SF) added to the By property class, the average Class A market during 2011 and just three (3)200,000 rental rate of $28.89 per SF increased buildings have delivered in 2012. The by 7.4% from $26.90 per SF and Class largest project completed within the past100,000 C increased by 3.9% to $17.25 per SF twelve months was the University of from $16.61 per SF in 4Q 2011. In Texas MD Anderson Cancer Center 0 contrast, the average Class B rate of Administration Building located at 7007 $22.17 per SF decreased from $22.43 Bertner Avenue in the Texas Medical 1Q-10 2Q-10 3Q-10 4Q-10 1Q-11 2Q-11 3Q-11 4Q-11 1Q-12 2Q-12-100,000 per SF in 4Q 2011. Center (895,600 SF owner occupied). Presently, only two medical office MEDICAL OFFICE CLASS A & B VACANCY VS. RENTS buildings are under construction including: Pearland Kirby Medical Plaza 20% located at 15015 Kirby Dr. in the South submarket (44,579 SF and 55% pre- 18% leased) and 3117 College Park Dr. in The Woodlands (30,000 SF and 23% pre- 16% leased). 14% Absorption & Demand 12% Houston medical office buildings recorded 188,077 SF of positive net 10% absorption in 2Q 2012, pushing year-to- date 2012 net absorption to 911,996 SF. 8% By property class, Class A posted the largest amount of year-to-date positive Class A Vacancy Class B Vacancy net absorption with 669,590 SF, Class A Rents Class B Rents COLLIERS INTERNATIONAL | P. 2

MEDICAL OFFICE & HEALTHCARE MARKET COMMENTARY | MIDYEAR 2012 | COLLIERS INTERNATIONAL HOUSTON TEXAS Sales Activity Leasing Activity 2012 YEAR TO DATE SALES Transaction activity remained steady Houston’s 2012 midyear medical officeReliant Northwest Houston during the first half of 2012, with 23 leasing activity reached 275,322 SF. By20180 Chasewood Park Dr properties changing hands. According to property class, Class B product led theFM 1960/Hwy 249 Submarket CoStar Comps, Houston medical sales market with 181,195 SF leased, followed by transactions had a total dollar volume of Class C at 47,773 SF, then Class A at $500M, averaging $239 per SF with an 46,354 SF. 8% capitalization rate. Although the majority of new leases signed Many of the transactions were multi- in the first half of the year were in the property sales; however, there were 1,000 - 5,000 SF range, there were a few several significant single property larger lease transactions.RBA: 65,000 SFBuilt: 2012 transactions that occurred. One of the larger transactions wasBuyer: American Realty Capital The 65,000 SF Reliant Northwest Houston Southwest Key Program’s lease of 25,000 Healthcare Trust, Inc.Seller: The Cirrus Group LLC Rehabilitation Center in the FM 1960/Hwy SF at 1550 LaConcha Ln in the SouthSale Date: May 2012 249 submarket was purchased by Main/Medical Center submarket.Sale Price: $31.6M American Realty Capital Healthcare Trust, Additional lease transactions include: Inc. in May 2012 for $31.6M or $486 per Hillcroft Medical Clinic expanded its lease SF.MD Anderson Regional Care Center by 11,390 SF in 2500 Fondren Rd, Offices18100 Saint John Dr The 60,329 SF MD Anderson Regional at Piney Point II in the Katy FreewayNASA/Clear Lake Submarket Care Center in the NASA/Clear Lake submarket; New Dimensions Home submarket was purchased by Hcri Nassau Healthcare Plus Inc leased 4,819 SF at Bay Medical Facility, LLC for an 4949 Fairmont Parkway in Pasadena; undisclosed amount. The property was Texas Home Health Inc. renewed 9,828 SF built in 1986 and was 100% leased at the and expanded by 4,121 SF in Northwest time of sale. Crossing II located at 7676 Hillmont St in the Northwest submarket. The 55,650 SF, 42-bed, KindredRBA: 60,329 SFBuilt: 1986 Healthcare Rehabilitation Center, locatedBuyer: Hcri Nassau Bay Medical at 18939 McKay Dr in the Greenspoint/IAH Facility, LLC submarket was purchased by LexingtonSeller: First Cambridge HCI Realty Trust for $27.8M or $500 per SF. AcquisitionsSale Date: January 2012 Senior Housing Props Tr purchased the 63,082 SF Willowbrook Medical Arts Building from B&W Holdings Ltd forKindred Healthcare18939 McKay Dr $16.8M or $266 per SF. The property isGreenspoint/IAH Submarket located in the FM 1960/Hwy 249 submarket and was 100% occupied at the time of sale. Willowbrook Medical Arts Building 13215 Dotson Rd FM 1960/Hwy 249 SubmarketRBA: 55,650 SF RBA: 63,082 SFBuilt: 2012 Built: 2007Buyer: Lexington Realty Trust Buyer: Senior Housing Props TrSeller: Intercontinental Medical Seller: B&W Holdings Ltd Plaza LP Sale Date: July 2012Sale Date: May 2012 Sale Price: $16.8MSale Price: $27.8M Source: Costar Group; Real Capital Analytics COLLIERS INTERNATIONAL | P. 3

MEDICAL OFFICE & HEALTHCARE MARKET COMMENTARY | MIDYEAR 2012 | COLLIERS INTERNATIONAL HOUSTON TEXAS 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 $14 billion. TMC is also one of Houston’s largest employers with 92,500 employees, including physicians, scientists, researchers and other advanced degree professionals in the life sciences. The internationally-renowned, 1,300-acre TMC is the world’s largest medical complex with 52 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. Member institutions include 13 hospitals and two specialized patient facilities, as well as 19 renowned academic and research institutions virtually covering all health- related careers – including two medical schools, four nursing schools, as well as schools of dentistry, public health, and pharmacy – and 15 support services organizations. Over 69,000 students – including more than 7,000 international students – are affiliated with TMC, including high school, college and health profession graduate programs. More than 7.1 million patients visited in 2011, including approximately 16,000 international patient visits. The University of Texas M.D. Anderson Cancer Center In addition to the medical facilities and institutions of higher ranked #1 in U.S. News & World Reports’ “America’s learning, TMC is also home to more than 280 professional Best Hospitals” for cancer care. buildings. Overall, the complex covers over 18 miles of public and private streets and roadways, with 45.5 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. In terms of future growth, TMC has approved $7.1 billion in building and infrastructure investments between 2008 and 2012, with annual research expenditures estimated at $1 billion. TMC Patient Care Institutions TMC Academic and Research Institutions The University of Texas M.D. Anderson Cancer Center Texas Children’s Hospital Neurological Research Institute Texas Children’s Hospital Baylor College of Medicine Memorial Hermann Hospital System The University of Texas Health Science Center at Houston The Methodist Hospital The University of Texas M.D. Anderson Cancer Center St. Luke’s Episcopal Hospital University of Houston College of Pharmacy Lyndon B. Johnson General Hospital Rice University Quentin Mease Community Hospital Texas A&M University Health Science Center Ben Taub General Hospital Prairie View A&M University College of Nursing The Institute for Rehabilitation and Research Texas Woman’s University Institute of Health Sciences The Hospice at the Texas Medical Center Texas Southern University College of Pharmacy and Health Sciences Texas Heart Institute Harris County Psychiatric Center Shriners Hospitals for Children – Houston Houston Academy of Medicine Veterans Affairs Medical Center in Houston COLLIERS INTERNATIONAL | P. 4

MEDICAL OFFICE & HEALTHCARE MARKET COMMENTARY | MIDYEAR 2012 | COLLIERS INTERNATIONAL HOUSTON TEXAS Houston Area Hospital Locations COLLIERS INTERNATIONAL | P. 5

MEDICAL OFFICE & HEALTHCARE MARKET COMMENTARY | MIDYEAR 2012 | COLLIERS INTERNATIONAL HOUSTON TEXAS LISA R. BRIDGES COLLIERS INTERNATIONAL | HOUSTON Director of Market Research Houston 1300 Post Oak Boulevard Direct +1 713 830 2125 Suite 200 Fax +1 713 830 2118 Houston, Texas 77056 lisa.bridges@colliers.com Main +1 713 222 2111 Accelerating success. COLLIERS INTERNATIONAL | P. 6

Houston 2Q 2012 Medical Office Report

by Coy Davidson on Aug 20, 2012

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