2022 | Second-Half Houston Healthcare Market Report

• Vacancy decreased annually
• Positive absorption recorded
• Construction up year over year
• Rental rates rose quarterly and annually

Houston Highlights

Houston’s medical office building (MOB) market posted 222,852 square feet of positive net absorption in the second half of 2022, bringing the year-end total to 867,341 square feet. The vacancy rate fell over the year from 12.3% to 11.9%. Houston’s MOB inventory increased annually, adding 784,270 square feet of new inventory. There is 2.7 million SF of MOB space under construction. The average asking NNN rental rate rose annually from $23.30 per SF in Q4 2021 to $23.93 per SF in Q4 2022. Transaction volume increased on an annual basis. According to our data provider Revista, the 2022 total transaction volume is just over $1.24 billion and the average CAP rate is 4.92%.

Market Indicators

Historic Comparison- MOB only

The statistical historic comparison table 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.

Market Fundamentals

The forecast in the graph above is based on a trailing eight-quarter average.

Recent Transactions in the Market

Sale* DaVita Anchored MOB 11321 Fallbrook Dr FM 1960 | 15.4k SF		Lease Renewal* Houston Methodist Hospital Pearland Medical Commons Pearland | 45.7k SF
Lease Expansion/Renewal* Houston Methodist Hospital 4501 Magnolia Cove Dr Kingwood | 23.3k SF		Sale* Fresenius Dialysis Center 8303 Creekbend Dr Southwest Beltway 8 | 11.2K SF

Executive Summary

Commentary by Beth Young, CCIM, LEED AP

The evidence for the 2022 Houston healthcare market revealed a strong desire by investors for quality medical office buildings even though the fourth quarter presented a distinct reduction in transaction volume and an increase in interest rates. The year produced 51 medical office building (MOB) sales transactions, with 17 properties located oncampus and 34 off-campus for a total of 3,099,797 square feet. The transaction volume was up 194.8% for a value of $1.242 billion, heavily influenced by the 17 transactions (both on- and off-campus) in the Houston market that was part of the Healthcare Realty Trust (HR)/Healthcare Trust of America (HTA) deal which closed in August. Over the last trailing twelve months (TTM) ending January 31, 2023, transactions averaged $407.33 per SF compared to approximately $375.00/SF in 2021. The REITs’ transactions also influenced the cap rates, which fell to an average of 4.9% (dropping from 6.25% in the first six months of 2022).

Only five sales transactions were completed in the fourth quarter, indicating that the lending challenges slowed healthcare real estate activity, making it difficult for developers and investors to obtain debt and close transactions until economic conditions stabilize enough to satisfy lenders and borrowers. Many investors see this as a buying opportunity since cap rates have not been this high since 2010 and 2011.

Some are planning to use cash for good opportunities. Most owners who had planned to sell expect to hold their properties temporarily, hoping interest rates and cap rates will drop again soon so they can achieve the higher prices they witnessed one year ago.

Studies show that because older citizens will require nearly 50% more medical services in the next ten years, up to a third of hospital revenue activity will continue to move off-campus to ambulatory surgery centers (ASCs), office-based labs, and other medical-office sites to provide convenient, local access to major medical providers. Statistics indicate that there is insufficient square footage available to accommodate the significant growth seen in the healthcare real estate sector, with the rate of absorption almost outpacing new product deliveries. Houston currently has the most healthcare properties under construction of any city in the U.S., but only off-campus construction was completed during 2022. Of the almost 43.5 million square feet of medical office buildings (MOBs) in the metro area, 784,270 square feet (SF) were added last year.

Much of the 523,100 SF of construction started in 2022 occurred in the Texas Medical Center (TMC). In addition to the TMC’s Helix Park and the TMC3 (the $1.5 billion medical research campus expansion), some notable planned projects in the greater Houston area include:

•  Kelsey Seybold, Clear Lake expands to 116,000 SF with ASC
  and cancer center
  
• Kelsey Seybold has seven properties under construction in
  areas throughout the metro
  
• Baylor St. Luke’s Health System has renovated O’Quinn
  Medical Tower for $426M with an award-winning cancer
  center
  
• UTMB Health League City expands from five to 11 floors
  for a $250M project
  
• Saturn Plaza is an 80,000 SF MOB at 18505 Saturn Lane,
  Nassau Bay
  
• Memorial Hermann Hospital-Katy expansion of $167M
  includes 100 beds, trauma center, ERs, and MOB
  
• San Jacinto Biotechnology Center in Generation Park
  leases 15,000 SF in a new 60,000 SF building
  
• Houston Methodist Orthopedics & Sports Medicine, Clear
  Lake, opens 150,000 SF MOB in Nassau Bay
  
• HCA Houston Healthcare has a newly renovated property
  in Pasadena that includes a 31-bed rehab facility
  
• Moody Neurorehabilitation Institute will open a 64,000 SF
  facility for brain injury rehabilitation
  
• Houston Physicians Hospital in Webster expands by
  34,800 SF to nearly 84,000 SF with four more ORs
  
• HCA Houston Healthcare-Tomball renovations to the postpartum
  space will be valued around $19 million
  
• Levit Green’s first signed tenant is Sino Biological Inc. – a
  10,000 SF biotech company based in China
• Orion Medical is constructing a 50,000 SF MOB and ASC at
  Gulfpoint Business Park

With newly constructed medical properties and physicians desiring modern facilities that demonstrate updated design trends and better patient experiences, lease rates have continued to increase. Houston healthcare property landlords started the year at an average annual NNN rate of $22.43 per SF and had no problem increasing it to $23.93 per SF for a 2.5% growth rate by the end of December. Depending on the quality and location of the properties, MOB NNN rental rates ranged from $17.00 per SF on the low end to $33.56 per SF on the high-end. Based on demographics and healthcare trends, expect these rates to keep climbing. Stable tenants would benefit from locking in comfortable rates for long-term leases.

Most economists and CRE experts expect the economy to experience a mild recession later this year. As a result, healthcare is expected to remain a favored property type, even though many sales will be delayed until late in 2023 or early 2024. Distressed assets will be challenged upon debt maturity; many owners will be unable to put more capital into their assets, forcing a return of their keys to the bank. Some investors will see this as the perfect opportunity to use the cash they have been saving for purchases of value-add and distressed properties. They are prepared and waiting to
renovate those MOBs and put them back on the market for new medical tenants.