RECI Q1 2016 Houston MOB Report

Real Estate Counselors International, Inc.
1 April 2016Houston, TX Metro Area
A market report for healthcare real estate executives
METRO HOUSTON MEDICAL OFFICE BUILDING MARKET OVERVIEW – Q1 2016
Quarterly Change in United States Gross
Domestic Product
Sources: U.S. Bureau of Economic Analysis and Real Estate
Counselors International, Inc.
Medical Office Building* and
Hospital Jobs:
United States and Metro Houston
Sources: U.S Bureau of Labor Statistics, Moody’s Economic.com
and Real Estate Counselors International, Inc.
Recent/Forecast Quarterly Change in
Metro Houston Employment: 2007- 2018
Sources: United States Bureau of Labor Statistics, Moody’s
Analytics, and Real Estate Counselors International, Inc.
*Note: MOB jobs are defined to include selected
ambulatory healthcare establishments including
Offices of Physicians, Outpatient Care Centers,
Offices of Other Health Practitioners and Medical
and Diagnostic Laboratories.
Executive Summary
We are now in the fourth longest expansion in the nation's economic
history, according to data available from the U.S. Bureau of Economic
Analysis. Concern over an impending recession, which peaked when the
global financial markets were at recent lows in January/February of this year
are unfounded, according to Moody’s Analytics.
Nearly all other economic data, including the rate of job creation, a nearly
record low number of layoffs, the number of workers quitting their jobs and
record high number of job openings portrays a positive outlook for the U.S.
economy. Notwithstanding, the economy is not without some challenges.
GDP growth has slowed dramatically. The 1st
quarter real change in GDP was
barely positive, following a weak gain in the 4th
quarter of last year.
U.S. job gains remain very strong, with no indication that this will not
continue. According to Moody’s Analytics, job gains are a better representation
of the reality of the economy's performance and near-term prospects than GDP
growth, at the moment. Nationally, both Hospital and Medical Office Building
jobs* are forecast to continue their recent growth trend.
Job growth in metro Houston began to slow in the 4th
quarter of 2014, a
direct result of retrenchment of the metro oil and gas sector, which is nearly six
times more concentrated in Houston than it is in the U.S., as a whole. As a
consequence, Medical Office jobs in Houston are expected to remain flat
throughout 2016.
Houston Class A/B MOB Market Highlights in the 1st
Quarter 2016
 MOB Space Under Construction had declined to about 217,000 SF
 Vacancy Rate: 13.20%, up from 12.80% in the 1st
quarter 2015.
 1st
Quarter Net Absorption of 142,357 SF, reflecting an absorption rate
consistent with each of the last four years.
 1st
Quarter Average Rent, at $25.13 PSF, Gross, is 0.7% below the 1st
Quarter 2015 rent (and 3.5% below the 4th
quarter 2015 rent).
Houston Metro Economic Outlook
Total payroll jobs will remain flat through at least the 1st
quarter 2017,
according to Moody’s Analytics; a rebound is anticipated in the 2nd
half of 2017.
The metro area Construction, Education/Health Services and
Leisure/Hospitality sectors will most likely lead the jobs recovery.
Metro MOB Market Outlook
The Houston MOB market is showing signs of weakness, as demand
slows, even in the face of lower levels of deliveries. The vacancy rate is
expected to rise and the average rent will be flat or continue to exhibit minimal
declines. We expect MOB jobs to rebound in early 2017 and with it, stronger
demand for MOB space. The long-term demand outlook for MOB space in
metro Houston is very positive.
‐10.0%
‐8.0%
‐6.0%
‐4.0%
‐2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
GDP Annualized Percentage Change
Year/Quarter
100.0
104.0
108.0
112.0
116.0
120.0
124.0
128.0
132.0
136.0
140.0
144.0
148.0
152.0
156.0
Employment Growth Index (2006 Q4 = 100.0)
Metro Houston ‐ MOB Jobs United States ‐ MOB Jobs
Metro Houston ‐ Hospital Jobs United States ‐ Hospital Jobs
‐8%
‐6%
‐4%
‐2%
0%
2%
4%
6%
8%
Annualized Quarterly % Change
Year/Quarter
United States Houston‐The Woodlands‐Sugar Land, TX Metropolitan Statistical Area

Historical and Forecast
Employment for the U.S. and
Metro Houston Economies
Medical Office Building Jobs: Metro
Houston and the United States
Metro Houston Oil and Gas Extraction
Jobs and Hospital and MOB Jobs
MOB job growth will flatten in the
face of declining oil & gas extraction
jobs.
HOUSTON METRO ECONOMY
Rapid total payroll job gains were reversed in the 2nd
half of 2014.
Job growth in metro Houston began to slow in the 4th
quarter of 2014, a
direct result of retrenchment of the metro oil and gas sector, which is nearly six
times more concentrated in Houston than it is in the U.S., as a whole.
Nationally, a drop in oil and gas production is clearly taking a toll on oil and gas
industry firms regardless of their size. Bloomberg Intelligence reports that in
the U.S. alone there are 3,870 idled oil and gas rigs. Even large firms such as
Halliburton and Schlumberger, with their numerous operations throughout the
world, are feeling the pullback of a lowered commodity price.
For every 100 jobs that are lost in the oil and gas industry there is the
potential that nearly 400 jobs will be lost in other sectors of the economy,
especially Construction, Manufacturing, Professional and Business Services,
Transportation/Utilities, Wholesale Trade and Financial Activities.
Metro Houston created 4,600 jobs in March, according to the Texas
Workforce Commission. In contrast, according to the Greater Houston
Partnership, over the past 25 years, March employment growth has averaged
around 14,000 jobs. The seasonally adjusted jobs data suggests an even
weaker picture – that the metro area actually lost 2,600 jobs in March, 2016.
This marks the second consecutive month of seasonally adjusted job losses.
Job losses continue in sectors most closely tied to energy - oil and gas
extraction, oil field services, the manufacture of fabricated metal products, the
manufacture of oil field equipment, transportation and warehousing,
engineering, and employment services.
Nevertheless, job losses have yet to spill into the consumer oriented
sectors. Thus far in 2016, the region added jobs in Construction, Real Estate,
Accommodation and Food Services, Arts and Recreation, Healthcare and
Government. Houston’s unemployment rate increased to 4.9% in March 2016,
only slightly below the U.S. rate of 5.1%. We expect the metro Houston
unemployment rate to rise above the U.S. rate sometime this year.
U.S. oil production is forecast to continue its drop in 2016, in part, a result
of rising inventories, according to Moody’s Analytics and the U.S. Energy
Information Administration forecast. United States crude oil inventories have
increased 20% since last August. Non-OPEC Oil production, overall, fell by
500,000 bpd in January 2016 as inefficient producers dropped out of the
market, leading to job losses. The U.S. Energy Information Administration
forecasts U.S production to average 8.6 million bpd in 2016 and 8.2 million bpd
in 2017.
The Healthcare sector is not immune from the turmoil in the Oil and Gas
sector. Moody’s Analytics is forecasting MOB jobs to remain flat throughout
2016. They are also forecasting a slight decline in Hospital jobs this year.
Recovery of these sectors is forecast for the second half of 2017.
‐8%
‐6%
‐4%
‐2%
0%
2%
4%
6%
8%
1989Q1 1991Q1 1993Q1 1995Q1 1997Q1 1999Q1 2001Q1 2003Q1 2005Q1 2007Q1 2009Q1 2011Q1 2013Q1 2015Q1 2017Q1
Year/Quarter
United States Houston‐The Woodlands‐Sugar Land, TX Metropolitan Statistical Area
‐1.0%
‐0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
Metro Houston ‐ MOB Jobs United States ‐ MOB Jobs
100.0
105.0
110.0
115.0
120.0
125.0
130.0
135.0
140.0
145.0
150.0
155.0
Employment Growth Index (2006 Q4 = 100.0)
Metro Houston ‐ MOB Jobs Metro Houston ‐ Hospital Jobs Metro Houston ‐ Oil and Gas Extraction Jobs

Metro Houston MOB Construction
Sources: CoStar Group, Inc. and Real Estate Counselors
International, Inc.
Metro Houston MOB Demand/Supply:
Deliveries, Absorption Vacancy and
Change in Average Rent
International, Inc.
Note: Percentage change in rent represents the quarter to
quarter change.
Trend of MOB Gross Asking Rents for
Houston Metro Market
International, Inc.
The positive trend of the MOB
average asking rent was reversed in
the 1st
quarter 2016.
HOUSTON MEDICAL OFFICE BUILDING DEMAND/SUPPLY
The Evolution of Healthcare Real Estate Demand in the U.S.
Demand for off-campus medical office buildings (MOBs) over the next
several years, will be fueled by increased focus on outpatient services by
hospitals and large physician groups; continued movement of outpatient
services to superior off-campus locations with high identity and superior
accessibility; and an increasing diversity in the mix of practice types at off-
campus locations, including those traditionally found at hospital locations.
Specific healthcare industry trends shaping the healthcare real estate
landscape include: (1) the continuing trend of healthcare network acquisition of
physician practices; (2) expansion of hospital based labs that leverage the
steadily growing laboratory market and high reimbursement rates; (3) the
emergence of freestanding emergency care facilities and evolution of urgent
care facilities; and (4) a wide range of industry initiatives intended to increase
access to healthcare, deliver care in a cost-effective venue, eliminate “care
delivery silos” and improve patient outcomes.
Metro Houston’s Class A/B Medical Office Buildings
At the end of the 1st
quarter 2016, the metro Houston Class A/B MOB
inventory encompassed 27.5 million square feet in 751 buildings according to
the CoStar property database. Between year-end 2010 and year-end 2015,
approximately 3.8 million square feet of MOB space was delivered to the
Houston metro market. Over this five year period, approximately 14% of
additional square feet had been added to market’s MOB inventory. MOB
space under construction had fallen to less the 0.5 million square feet by the
end of 2015, well below the 3.1 million square feet that was under construction
in mid-2007.
Net absorption over the last five years (2010-2015) totaled almost 3.9
million square feet, resulting in a vacancy rate that was 60 basis points lower at
the end of 2015 compared to year-end 2010.
Looking as far back as 2006, though there were periods when supply
exceeded demand, the imbalance was not prolonged. This is especially
significant when one considers that this metro market has seen an
approximately 50% increase in supply between early 2006 and early 2016.
This rapid pace of deliveries placed upward pressure on the vacancy rate and
downward pressure on rental rate growth. Notwithstanding, metro Houston net
absorption remained strong and exceeded new supply for five of the last nine
years. The vacancy rate spiked in 2008 and 2012, but has remained under
15% since 2008. Prior to the 1st
quarter 2016, the average Class A/B MOB
rent continued to increase during the post-recession period (i.e., since at least
2010).
At the end of the 1st
quarter 2016, the Houston Class A/B medical office
inventory exhibited a vacancy rate of 13.2% and an average rent of $25.15 per
square foot, gross. Additional statistics are presented at the top left of the
following page.
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
16.0%
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
2,000,000
2,200,000
2,400,000
2,600,000
2,800,000
3,000,000
3,200,000
% Under Construction / Inventory
Square Feet Under Construction
Square Feet Under Construction % Under Construction / Inventory
14.1%
15.5%
13.9%
13.2%
13.8%
14.6%
12.3% 12.0%
12.5%
13.2%
7.3%
3.0%
0.5%
‐0.9%
2.7%
‐0.1%
0.6%
4.0%
1.7%
‐3.5%
‐500,000
‐250,000
0
250,000
500,000
750,000
1,000,000
1,250,000
1,500,000
1,750,000
2,000,000
‐5.0%
‐2.5%
0.0%
2.5%
5.0%
7.5%
10.0%
12.5%
15.0%
17.5%
20.0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD
2016 Q1
Square Feet (Deliveries and Absorption)
Percent (Vacancy Rate and % Change in Asking Rent
Deliveries Absorption Vacancy Rate % Change in Asking Rent
$22.65
$23.33 $23.45 $23.24
$23.87 $23.84 $23.99
$24.95
$25.37 $25.15
$17.00
$18.00
$19.00
$20.00
$21.00
$22.00
$23.00
$24.00
$25.00
$26.00
$27.00
$28.00
$29.00
$30.00
100.00
101.00
102.00
103.00
104.00
105.00
106.00
107.00
108.00
109.00
110.00
111.00
112.00
113.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Q1
Gross Asking Rent, Per Square Foot
Rent Growth Index (2007 = 100.0)
Asking Rent Gross Rent Growth Index

Metro Houston MOB Demand/Supply
Indicators: Q1 2015 and Q1 2016
Sources: CoStar Group, Inc. and Real Estate Counselors International,
Inc.
MOB Sales Capitalization Rates and
Average Annual Prices Per Square Foot
International, Inc.
Note: These data include some properties located in a few other
Texas MSAs, but the tabulation results would not be materially
different had they been removed from these data.
Investor Profile of MOB Investment
Sales: Transacted Since January 2011
International, Inc.
METRO HOUSTON MOB INVESTMENT SALES TRENDS
Since 2007, approximately 35% of all MOB investment sales activity was
concentrated in or near three Houston office submarkets – S. Main/Medical
Center, totaling $230 million (e.g., Healthcare Trust of America, Inc. - $56
million and Welltower - $79 million), Southwest/Hillcroft, totaling $225
million (i.e., HCP REIT 11 building portfolio), and East Fort Bend
County/Sugar Land, totaling $205 million (e.g., St. Luke - $153 million).
Since 2006, Houston MOB investment sales have exhibited
capitalization rates that peaked around 8.5% in 2009 and reached a low of
6.8% in 2013. Since the recent nadir in 2013, capitalization rates increased
by 75 basis points to 7.2%, as of year-end 2015. The average sales price
per square foot, reflecting sales since 2014, is approximately 18% below the
average sale price reported between 2010 and 2012. This variance more
than likely reflects the age and class characteristics of the portfolios
purchased over these time frames.
The average gross asking rent for the investment sales transacted since
year-end 2014 was approximately $21 per square foot compared to the total
Class A/B market inventory average of approximately $25 per square foot,
gross. The current vacancy rate for these sales has averaged approximately
11%, about 200 basis points lower than the total Class A/B market inventory
average of approximately 13%.
There are 14 top buyers who each amassed over $20.0 million worth of
MOBs since 2011. On average, these buyers paid $240 per square foot
which is well above the market average per square foot sale price of the last
five years. These portfolio sales ranged in price from $115 per square foot
(Dunhill Partners, Inc.) to $449 per square foot (St. Luke’s). These data
represent buyers at the time of the transaction, thus the buyers listed below
may not represent current ownership. For example, American Realty Capital
Healthcare Trust, Inc. was sold to Ventas REIT in January, 2015.
Largest Medical Office Building Portfolio Investment Sales Since January 2011
Sources: CoStar Group, Inc. and Real Estate Counselors International, Inc.
Note: These data include some properties located in a few other Texas MSAs, but the tabulation results
would not be not materially different had they been removed from these data.
Demand/Supply Variables
Class A/B
Medical Office
Buildings
Number of Properties, 2016 Q1 751
Total Net Rentable Square Feet, 2016 Q1 27,508,920
Vacancy Rate, 2016 Q1 13.20%
Vacancy Rate, 2015 Q1 12.80%
Basis Point Change in Vacancy, 2015 Q1 to 2016 Q1 40
Gross Asking Rent, 2016 Q1 $25.15
Gross Asking Rent, 2015 Q1 $25.33
% Change in Asking Rent, 2015 Q1 to 2016 Q1 ‐0.7%
Space Absorbed, 2015 Q1 to 2016 Q1 1,074,510
Space Delivered, 2015 Q1 to 2016 Q1 1,338,695
Space Under Construction, 2015 Q1 1,329,740
Space Under Construction, 2016 Q1 271,275
$165
$157
$148
$99
$228
$207
$230
$71
$181
$214
$25
$50
$75
$100
$125
$150
$175
$200
$225
$250
$275
$300
$325
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
10.5%
11.0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Sales Price Per Square Foot
Capitalization Rate
Average Price Per Bldg SF Average Cap Rate
48%
7%
28%
17%
REIT/Public Institutionals Private User
# Buyer Acquistion Total Square Feet Price PSF
1 HCP, Inc. $225,000,000 1,281,014 $176
2 St. Luke's Episcopal Health System Corporation $153,000,000 341,000 $449
3 Welltower Inc. $93,000,000 380,513 $244
4 CNL Healthcare Properties, Inc. $76,000,000 226,714 $335
5 Healthcare Trust of America, Inc $55,895,485 279,081 $200
6 Physicians Realty Trust $46,700,000 157,605 $296
7 Dunhill Partners, Inc. $45,000,000 390,521 $115
8 First Washington Realty, Inc. $43,150,000 125,186 $345
9 Duke Realty Corporation $38,750,000 168,850 $229
10 Griffin Capital Corporation $31,824,956 118,000 $270
11 Webster Surgical Specialty Hospital, Ltd $30,000,000 91,082 $329
12 Ventas, Inc. $26,279,000 95,230 $276
13 American Realty Capital Healthcare Trust, Inc. $23,276,000 52,345 $445
14 Sentinel Real Estate Corporation $21,400,000 80,740 $265

Since January 2011, Houston MOB investment sale transactions totaled $1.1 billion. Metro Houston MOB sales
volume totaled $59.4 million during the 1st
quarter 2016 and $340.5 million throughout all of 2015. Some of the largest
sales in the S. Main/Texas Medical Center submarket since 2011 include the Plaza Medical Center, Medical Center
Crossing, Holcombe Professional Center and 7900 Fannin Street.
METRO HOUSTON MOB SALES SINCE 2011
S. MAIN/TEXAS MED CENTER SALES SINCE 2011
Note: All information is from sources deemed reliable; however, no representation is made as to the accuracy thereof.

We have long-term relationships with healthcare providers, major corporations, financial institutions, developers, investors,
government agencies, and other public and private concerns. Among our specialties are:
 Stark law Compliance
 Fair Market Value Rent Studies
 Property Appraisals
 Acquisition Due Diligence
 Disposition Pricing
 Forensic Due Diligence/Evaluations
 Portfolio Valuations
 Litigation Support/Dispute
Resolution
 Market Feasibility Analysis
Since 2007, Real Estate Counselors International Inc. has performed a spring and fall survey of medical office buildings in
the metro Chicago market. Our proprietary database contains hundreds of contract and asking lease terms collected over
the last several years. In 2010, at the request of a national healthcare network, we expanded our survey to the Boston, MA
region. There, we also perform an annual MOB rental survey each spring.
RECI is an independently owned, commercial real estate valuation and consulting company headquartered in Chicago,
Illinois. With roots to 1935, we have earned the reputation as a full-service firm known for our ability to perform high level,
complex projects.

RECI Q1 2016 Houston MOB Report

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