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2020 | Year-End Houston Healthcare Market Report

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Houston healthcare real estate market holds steady during COVID-19


Healthcare Trends

Commentary by Beth Young, CCIM, LEED AP | Senior Vice President

2020 was a rough year for healthcare, but the medical office market reacted quickly and adjusted to the unusual challenges, demonstrating another reason why it has become such a strong sector in commercial real estate.



Houston medical-office building (MOB) vacancies were at 16% EOY-2020 vs 15.2% EOY-2019 for Houston MOB vacancies. Yes, vacancy appears to have ticked up 0.8% for medical space, but the surprise is that during that time, nine (9) new MOBs came on the market for a total of 372,956 new square feet (SF), according to Revista, a national database/website dedicated to medical properties. Absorption outpaced new development deliveries, with four buildings completed in the first half totaling 163,656 square feet, and five more in the second half totaling 209,300 square feet. There were 1,387,016 SF under construction at year end. Although tenants still planned relocations, COVID-19 delayed some tenants from moving in on their planned dates.


Landlords reported that medical rent collections have generally remained strong. Houston medical-office rents have stayed basically within a $1.50 per square foot (SF) range for six (6) years. In the fourth quarter, medical office property rates increased from a dip to $25.59 mid-year, finishing up $0.05 higher than 2019 with average asking rates of $25.85 per square foot.

Sales Volume

It is no secret that there has been a substantial rise in capital targeting the medical office sector. Some studies report that there is up to $5 billion on the sidelines waiting for the right opportunities. Real Capital Analytics reported that Houston’s top investors in the medical office market over the past two years were Harrison Street Realty Capital and Pinecroft Realty, private investors that often team up for local acquisitions. Welltower, a REIT which is the second top owner of medical real estate in the U.S., acquired the same number of Houston medical properties, followed by three more REITs investing in Houston: Healthcare Realty Trust, HTA and Physicians Realty Trust. REITs experienced significant stock price drops at the beginning of the pandemic, but rebounded in recent months. Because of that, they were less active as a buyer group in 2020 than they usually are.

Very few sales prices are published in Texas, but Revista reports that the 17 MOBs sold in Houston in 2020 for a total of 943,069 SF compared to the 781,945 SF sold in 2019. Nationally, medical properties experienced a slight drop off in sales activity, with an average volume of $4-4.5 billion per quarter for previous years. In the graph below, hospitals are light blue and MOBs are dark blue.

One additional and interesting note: in the last three days of 2020, more than 50 MOBs with a total of 1.87 million square feet of space transacted nationally. Sale price data is not yet available for all of those deals. But the transactions that do include price data total $456.4 million. If we apply the average price for MOBs in the fourth quarter of $341 per square foot to the transactions without verified prices, the dollar volume from those three days alone could total $800 million.

CAP Rates

Pricing and capitalization (cap) rates or first-year estimated returns have remained steady from pre-COVID levels. In the next graph provided by Real Capital Analytics, MOBs are dark blue and Office buildings are light blue. In the last three to four years, medical office and office buildings have run in tandem. But prior to that, there was a gap. Currently, both property types are averaging about 6.6-6.7% cap rates nationally. Reports indicated that Houston’s average cap rates for MOBs decreased each quarter, starting at 6.19% and finishing at 5.55%. Medical office buildings attract a wide range of investor types, including those who have never purchased medical properties before. Currently, cap rates can easily dip into the 5’s and even lower for the highest quality assets located on a hospital campus or very nearby.

Major New Construction

CHI St. Luke’s/Baylor Medical Center announced that they will build a 400,000 SF MOB and ambulatory surgery center. Texas A&M University plans to renovate an 18-story tower, build a new 19-story student housing tower and a new 17-story MOB for a total of 1.9M SF called Innovation Plaza. Under construction is a major public mental health hospital near the Texas Medical Center, set to open its doors in late 2021. It is the largest facility of its kind in the United States, with 264 beds connected by a glazed bridge to the existing UT Harris County Psychiatric Center.

Statistics show a similar amount of new MOB space being delivered in the following top-ten markets during 2020. Note that Houston, which has more new construction and delivery activity than most of the top-ten cities by Q4 2020 results in a slightly higher vacancy rate based on information from Revista. The vacancy rate for Houston in the graph below differs from the CoStar vacancy rate shown on page 1 of the report as the CoStar data includes buildings that have a mix of medical and general purpose tenants.


Additional Trends

Expect a steady rate of new construction and investment opportunities in the healthcare sector, with a design focused on safety and efficiency. Although the nationwide footprint for MOBs has increased by 4.5 percent in the last five years, another medical building type has grown by 44 percent during the same time frame: urgent care centers (UCCs), usually located in retail settings. Retail options continue to grow with clinics including Walgreens and CVS. Mail-order prescriptions are becoming more popular with patients,
and Amazon has added that to their services. Telehealth (virtual appointments) have increased four-fold during the pandemic, particularly for follow-up consultations. In addition to reaching patients in remote or underserved locations, telehealth options are expected to keep patients more loyal to a particular group practice or health system. Physical spaces will gradually shift to more efficient layouts, including smaller waiting rooms and fewer exam rooms, along with specific flows for check-in and check-out spaces. The Advisory Board Company predicts that patient volumes for hospitals and health systems are likely never to reach levels they were at pre-COVID. With that in mind, health systems will strategize to increase their ambulatory (off-campus) delivery networks to bring services closer to patients and increase their market share.

In summary, Houston’s medical office space is outperforming the wider office sector. Supply and demand remain in balance for the healthcare sector, and although vacancy rose very slightly (due to new development in the Houston market), it is at a healthy level. There has been no downturn in construction activity, but COVID appears to be delaying the openings of some new MOBs. Rental rates are holding up well, the number of sales is steady, and the square footage for MOBs increased. With that in mind, the medical office sector in Houston is staying healthy.



Houston's TMC

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.




Year-End 2020 Houston Medical Office Highlights



2020 | Year-End Houston Healthcare Market Report

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