1. MIDYEAR 2012 | MEDICAL OFFICE
COLLIERS HEALTHCARE SERVICES GROUP - Houston Texas
HEALTHCARE 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%
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2. 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 C
5,265,459 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 at
700,000 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 building
600,000 sublease space.
landlords continued to offer lease
500,000
Disciplined medical office development concessions including free rent and
activity has helped prevent major generous tenant improvement packages
400,000 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 past
100,000 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
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3. 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 office
Reliant Northwest Houston during the first half of 2012, with 23 leasing activity reached 275,322 SF. By
20180 Chasewood Park Dr properties changing hands. According to property class, Class B product led the
FM 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 SF
Built: 2012 transactions that occurred.
One of the larger transactions was
Buyer: 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 South
Sale 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, Offices
18100 Saint John Dr The 60,329 SF MD Anderson Regional at Piney Point II in the Katy Freeway
NASA/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, Kindred
RBA: 60,329 SF
Built: 1986 Healthcare Rehabilitation Center, located
Buyer: Hcri Nassau Bay Medical at 18939 McKay Dr in the Greenspoint/IAH
Facility, LLC submarket was purchased by Lexington
Seller: First Cambridge HCI Realty Trust for $27.8M or $500 per SF.
Acquisitions
Sale Date: January 2012 Senior Housing Props Tr purchased the
63,082 SF Willowbrook Medical Arts
Building from B&W Holdings Ltd for
Kindred Healthcare
18939 McKay Dr
$16.8M or $266 per SF. The property is
Greenspoint/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 Submarket
RBA: 55,650 SF RBA: 63,082 SF
Built: 2012 Built: 2007
Buyer: Lexington Realty Trust Buyer: Senior Housing Props Tr
Seller: Intercontinental Medical Seller: B&W Holdings Ltd
Plaza LP Sale Date: July 2012
Sale Date: May 2012 Sale Price: $16.8M
Sale Price: $27.8M Source: Costar Group; Real Capital Analytics
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4. 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
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5. MEDICAL OFFICE & HEALTHCARE MARKET COMMENTARY | MIDYEAR 2012 | COLLIERS INTERNATIONAL HOUSTON TEXAS
Houston Area Hospital Locations
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6. 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.
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