- Vacancy decreased annually and quarterly
- Year-end absorption is positive
- Construction and deliveries are up year over year
- Rental rates rose quarterly and annually
Houston’s medical office building (MOB) market posted 869,962 square feet of positive net absorption in Q4 2021, bringing the year-end total to 859,192 square feet. The vacancy rate fell over the year from 12.9% to 12.1%. Houston’s MOB inventory increased slightly with 471,245 square feet of new inventory added in the second half of 2021 and there is 2.4 million SF of MOB space under construction. The average asking NNN rental rate rose annually from $22.97 per SF to $23.29 per SF. Transaction volume decreased on an annual and quarterly basis. According to our data provider Revista, 2021 year-end transaction volume is just over $369.5 million and the average CAP rate is 6.59%..
Historic Comparison- MOB only
The forecast in the graph above is based on a trailing eight-quarter average.
The statistical historic comparison table to the left reflects medical office buildings (MOB) only.
The lease rates are an average of published available rates. Not all properties listed publish an asking rate. Our healthcare experts report actual deal rates trend slightly higher when incentives are included.
Commentary by Beth Young, CCIM, LEED AP | Senior Vice President
The pandemic emphasized many reasons why so many investors and lenders are chasing healthcare real estate. People showed up to their doctors’ offices even when they couldn’t go anywhere else. Conditions like stable tenants with strong-credit, good locations with high visibility, demographic drivers that heighten consumer demand, and long-term leases at market terms make this commercial real estate sector a constant winner. Some investors have used the words “durability” (speaking of credit) and “duration of income” (regarding lease terms) to describe why they want these buildings. Once investors noticed the resiliency of the asset class, pricing and allocations increased by all types of buyers.
The greater Houston medical office building (MOB) market includes nine counties, and has 43,175,700 square feet. As of the end of 2021, an additional 2,209,310 square feet were being developed based on statistics from Revista, a national database of healthcare properties.
Some of the current MOB and hospital projects over 100,000 square feet include the following:
*MOB - Medical Office Building
Rent in Houston properties continued to rise throughout 2021 and ended at an average lease rate (all types) of $23.04 per square foot. Asking rates generally ranged from $16.64 to $33.69, which provided a 1.2 percent increase over the previous year. As always, there are exceptions; and the average rate in properties that sold was $23.30 per square foot. Houston’s rates are marginally lower than the national average lease rate which was at $23.09 per square foot. Some notable leases in 2021 included UT Physicians at 6500 West Loop South for 139,243 square feet, Christus Health at 2900 N Loop West for 21,213 square feet, and Memorial Hermann Surgery Center at 2455-2473 S. Braeswood for 19,942 square feet.
Houston occupancy fell during the early part of the pandemic and rose during 2021, when over 800K square feet were absorbed in the marketplace. The Q4 2021 occupancy number was right at 88.0 percent. About a million square feet are scheduled to deliver in the market for 2022.
Newer or recently renovated MOBs are highly prized by healthcare property investors. The 2021 total sales for the greater Houston market has recently been revised up by Revista, the national resource for healthcare real estate data, to $369,516,836 made up of 31 properties and showing a 47.6 percent increase in the number of sales over the past twelve months. Since the total square feet sold was 1,088,858 SF, 1.6% percent less than the previous year, it explains the higher price per square foot of $439.90, which is 32.8 percent higher than one year ago. The greater Houston market ranked as the 8th most active metro in the country. National sales set a quarterly record in Q3 2021, and preliminarily finished the year with a sales volume of $15.3 billion, trailing only 2017. However, it is expected that 2021 will ultimately set another annual record as soon as final tallies are done.
The following graph shows how cap rates have compressed for MOBs in the U.S. over the past three years:
The following graph shows how cap rates have compressed for MOBs in the U.S. over the past three years:
MOB Cap Rate Trends | Portfolio vs. Single Property
The 25th percentile is for value-added properties, and the 75th/95th percentiles are institutional-quality properties. They may be even lower in some cases. In recent years, the difference in cap rates between on and off campus has widened to 5.7% average for on and 6.4% for off campus assets. These numbers reflect a combination of all types of asset classes. Sellers have learned that packaging multiple properties in one offering will usually bring a higher price per square foot, or a lower cap rate. Because of this trend, many owners are holding on to properties until they can offer several together as a portfolio. See the graph below based on national MOB sales to understand this theory:
Seller and Buyer types tend to fall into different cap rate ranges also. Below shows the national trends for both:
When interest rates go up, cap rates typically adjust upward also, meaning prices move down. While there was available debt at low interest rates, prices stayed high. Based on the prediction of several interest rate hikes in 2022, it will be interesting to see how much MOBs are affected.
Recent MOB Transactions
Sometimes our sources are able to provide prices and cap rates for MOB properties that have sold. Below are details on some 2021 sales.
2021 MOB Cap Rate Trends
2021 Hospital/Other Sales
HCA, the largest health system operating 45 hospitals in Texas, recently announced it is expanding to keep up with the growth in the state. It will add another hospital in Houston, while also adding hospitals in Dallas, San Antonio and Austin.
Houston Methodist, which has seven hospitals in the greater Houston area, is expanding their Sugar Land hospital by 466,000 square feet for $206 million, and expects it to be completed by early 2025. In addition, they have several new MOBs coming to the market. A $57 million, six-story, 160,000 square foot facility will be in Sugar Land. Another MOB will be built on the campus of its Houston Methodist West Hospital and is a $65 million project that is also six stories and 160,000 square feet. The projects should be completed in Q1 and Q3 2023, respectively. Methodist is also building a 150,000 square foot MOB in Clear Lake plus a 260,000 square foot hospital in The Woodlands that will open in May.
Memorial Hermann’s The Woodlands Hospital is also in progress. The cost is estimated at $250 million for the 475,630 square foot project which is expected to open in May. Their Medical Group has signed a 20,000 square foot build-to-suit lease to be developed by Howard Hughes in The Woodlands. Texas A&M is building a 485,000 square foot MOB called Horizon Tower. The cost is estimated at $215 million.
Hospitals track their development cap rates, price per bed and price per SF. Below shows the trailing twelve months (TTM) trend of trades higher than $2.5 million over the past three years:
Life Sciences and R&D
Houston has received recognition as one of the strongest cities on the list of top emerging clusters for life sciences in the U.S. According to the Greater Houston Partnership, Houston has more than 1,760 life sciences companies, hospitals, health care facilities and research institutions with a workforce that exceeds 320,000. Construction has begun on TMC3, the 37-acre, $1.8B innovative, collaborative plan anchored by leading research institutions and will become the central hub of the Texas Medical Center’s new life science campus. Several other large Houston landlords are also planning and growing life science campuses around the city, with some of the more notable locations including Generation Park within 4,200 acres northeast of Sam Houston Parkway N and Interstate 69, and Levit Green with 53 acres inside the 610 Loop, north of the TMC. Capital markets national activity in the life science sector climbed to new records in 2021, with investment volume hitting more than $18 billion – and experts expect pricing will only continue to rise this year. That’s a 64% increase year-over-year, according to one report. The annual average pricing for life science and R&D space with an office component hit an average of $537 per square foot nationally in 2021, more than 50% higher compared to figures from five years ago.
New Medical Education
Located in the Texas Medical Center, EnMed is a revolutionary medical education program where students receive medical doctorates and master of engineering degrees focused on the design and implementation of medical technologies in the same four years. They are in the planning stage for a 515,000 square foot MOB that would open in February of 2024. The estimated cost is $170 million. In summary, there is so much going on in Houston’s medical world that we can only include information about the largest projects in this report. Please contact us to discuss your healthcare property.
As we look ahead to 2022, investors and developers plan to remain busy; but they also say it will be a more challenging year for both acquisitions and new construction. The issues they continue to discuss include inflation, rising interest rates, more spread between asking and bidding prices, supply chain challenges and labor shortages. The appetite for healthcare properties is expected to be even stronger this year, but the lack of available product is expected to remain. Owners who are considering selling a single property explain that they are concerned they won’t be able to compete for a replacement MOB. They believe keeping the one they have that is producing income may be their best option. 2020 and 2021 were both years where sales of portfolios increased dramatically. The average price of the properties was higher in a portfolio than similar properties marketed individually. With that in mind, landlords of larger healthcare-property portfolios who plan to sell some buildings will probably hold them off the market until they can package them in a portfolio. Check back with us to see what trends are developing as the year goes on.
Houston's 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.