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Research &

Forecast Report

HOUSTON | HEALTHCARE
Mid-Year 2018

Houston healthcare real estate market continues


to demonstrate solid market fundamentals
Lisa Bridges Director of Market Research | Houston

Healthcare Trends Commentary by Coy Davidson


Despite the constant uncertainty associated with the healthcare
sector, the Houston healthcare real estate market continues to Market Indicators Annual Semi-Annual Semi-Annual
demonstrate solid market fundamentals with resurgent job growth Relative to prior period Change Change Forecast*
in the healthcare sector. Houston’s robust construction activity VACANCY
and steady leasing activity aids healthcare providers to continue
to implement strategies making patient care more convenient and NET ABSORPTION
cost-effective. NEW CONSTRUCTION

Healthcare Employment Resumes Growth UNDER CONSTRUCTION

Healthcare providers nationally remain under pressure to reduce *Projected


costs and as a result, staff reductions have been necessary. The
Houston healthcare sector posted a net loss of 1,400 jobs in 2017,
the only annual loss recorded in the last 25 years.

In May, Bay Area Regional Hospital located in Webster Texas,


Summary Statistics
ceased operations and filed for bankruptcy protection, laying off Houston Medical Office Market Q2 2017 Q1 2018 Q2 2018
900 employees.
Vacancy Rate 11.7% 12.1% 12.3%
However, Healthcare employment has rebounded in the Houston
MSA adding 3,400 jobs in the second quarter of 2018 pushing mid- Net Absorption 60,278 15,465 1,440
year employment growth to 4,000 jobs.
New Construction 282,224 86,595 103,020
TMC3
Under Construction* 709,669 467,843 445,137
The Texas Medical Center (TMC) in Houston is the largest medical
complex in the world at a total of 1,345 acres and 50 million square *Under Construction excludes hospitals, but includes the medical office buildings within the hospital
complex
feet of developed space and over 60-member institutions and it is
projected to get even bigger with a major life sciences initiative.
Asking Rents
TMC is developing a new biomedical research hub that will cluster Per Square Foot Per Year

researchers and industry experts together on a collaborative Average $24.70 $25.21 $24.96
30-acre campus. Groundbreaking for TMC3, the new campus, is
expected to begin in 2019 with completion slated for 2022 adding Class A $28.71 $29.28 $29.07
approximately 1.5 million square feet of research space to the TMC Class B $24.16 $24.62 $24.83
campus footprint.

Five institutions —Texas Medical Center, Baylor College of Medicine, .


Texas A&M University Health Science Center, University of Texas
Health Science Center at Houston and University of Texas MD Sales Activity
Anderson Cancer Center — are combining forces on the new TMC3. Source: Real Capital Analytics
Q2 2018
The new campus alone is expected to have a 5.2 billion dollar
impact on the city of Houston and create a projected 30,000 new NO. OF PROPERTIES: 22
jobs. TOTAL SF: 4.5M

Investor Activity AVERAGE $/SF: $81

AVERAGE CAP RATE: 6.0%


Investors are increasingly viewing medical office buildings (MOB)
which have demonstrated more stable occupancy rates than other
real estate asset classes as an increasingly attractive investment
Sales By Total ($)
opportunity. Despite a complex and challenging healthcare
landscape, in the long-term, investors foresee a healthcare delivery Rolling 12-mo. Total Quarterly Vol

system in the U.S. that is going to continue its shift to outpatient 1,000

Millions
settings. 2017 was a record year for MOB investment volume 900
nationally and the momentum has continued into 2018. 800
700
Houston with its reputation as a dynamic healthcare city, with a 600
stable economy and growing population, remains a favored target 500
market among healthcare real estate investors. 400
300
Landmark Sale 200
100
In July, LaSalle Investment Management acquired The Memorial 0
Hermann Medical Plaza located at 7400 Fannin in the Texas Q2 '14 Q2 '15 Q2 '16 Q2 '17 Q2 '18
Medical Center from a joint venture comprised of Misher Healthcare
and Memorial Hermann Healthcare. The 28-story, 510,000
square-foot, Class A+ medical office building in the Texas Medical Average Price Per SF
Center reportedly traded for a record-setting $405 million, which Houston U.S.
is believed to be the highest amount ever paid for a single medical 600
office building property in the U.S.
500
Other Notable Houston MOB Sales in the first half of 2018 include:
400
>> Heitman acquired a 17-building MOB portfolio from Bentall
Kennedy which included four Houston area medical office 300
buildings totaling 459,544 square feet, included in the sale were;
Memorial Hermann Katy Medical Plaza 1, Memorial Hermann Katy 200
Medical Plaza 2, Memorial Hermann Sugar Land Medical Plaza 1,
Memorial Hermann Sugar Land Medical Plaza 2. 100

>> Virtus Real Estate Capital based out of Austin acquired 251 & 0
253 Medical Center Blvd (86,297 SF) in Webster, Texas. Q2 '14 Q2 '15 Q2 '16 Q2 '17 Q2 '18

>> IRA Realty Capital acquired the 63,090 square foot, Katy Medical
Arts Center in Katy, Texas.

Expansions / Construction Activity


Healthcare providers are dealing with a myriad of challenges in
the face of softening admissions, changing consumer expectations
about healthcare, tight operating margins, shrinking budgets and
shifting policies. While facing these challenges many health systems
are looking to expand their access points to capture more patients
and drive referrals.

Outpatient clinics are more important than ever before as they


become the primary delivery vehicle for care. The traditional hub

2 Houston Research & Forecast Report | Mid-Year 2018 | Healthcare | Colliers International
and spoke model in healthcare, which puts hospitals at the center Job Growth & Unemployment
of care delivery, is changing to focus more on ambulatory care. (not seasonally adjusted)

The ambulatory network of the future is the hub of a care delivery


UNEMPLOYMENT 5/17 5/18
system and the health care system’s real estate footprint of the
future will include regional acute care hospitals paired with a HOUSTON 4.8% 4.2%
constellation of ambulatory facilities and medical office buildings
TEXAS 4.1% 3.7%
to include a mix of community-based comprehensive care centers
with a mixture of services, micro-hospitals, ambulatory surgery U.S. 4.1% 3.6%
centers, free-standing emergency departments, imaging centers,
primary care clinics and urgent care clinics.
Annual # of Jobs
JOB GROWTH Change Added
In addition to major expansions in the Texas Medical Center,
Houston area healthcare providers continue to expand their HOUSTON 2.6% 79.2K
presence in suburban markets which are driving construction
TEXAS 2.8% 344.7K
activity from both healthcare providers themselves as well as third-
party developers. U.S. 1.6% 2.4M

Healthcare construction projects total over 4.8 million square feet


in the Houston area with approximately 4.3 million square feet
of new hospital space under construction. The bulk of the new Medical Office
hospital construction comprises major expansion projects in the CLASS A RENTS AND VACANCY
Texas Medical Center by member institutions. However, Houston
Methodist Hospital is expanding their suburban campuses in Sugar
Class A Rents Class A Vacancy
Land and Baytown. UTMB is expanding their campus in League
$30.00 16.00%
City by 300,000 square feet and MD Anderson Cancer Center is
building a new 208,000 square foot Hospital in The Woodlands. $29.00
14.00%

New Medical Office Building development totals approximately $28.00


12.00%
500,000 square feet comprised of nine (9) projects dispersed $27.00
throughout several suburban submarkets. The largest medical office 10.00%
building currently under construction is Hedwig Place expected $26.00

to deliver 102,000 square feet to the in early 2019. The five-story 8.00%
$25.00
Class-A medical office in West Houston building broke ground 65%
pre-leased. $24.00 6.00%

Houston based developer Wile Interests recently announced plans


to break ground in the first quarter of 2019 on Medical Plaza *Vacancy percentage includes direct and sublease space.
West, a new 70,000 story Class-A Medical Office Building in West
Houston.
CLASS B RENTS AND VACANCY
Leasing Trends
Class B Rents Class B Vacancy
The bulk of leasing activity is coming from Hospital systems and
$26.00 15.00%
large physician practice groups as physicians continue to migrate
towards hospital system employment versus independent practice
14.00%
and as a result, the size of a typical medical office lease is trending
$24.00
upwards. However, healthcare leasing activity is not restricted 13.00%
solely to medical office buildings as healthcare providers are
increasingly opting for retail centers to establish outpatient clinics, 12.00%
$22.00
particularly in the faster-growing suburbs.
11.00%

$20.00 10.00%

*Vacancy percentage includes direct and sublease space.

3 Houston Research & Forecast Report | Mid-Year 2018 | Healthcare | Colliers International
Willis
149 105 Lake
Conroe
Cleveland
105

Conroe 105

149

Houston Area Hospital Locations


1488
242

1488 Magnolia 321


The Woodlands

Tomball
aller Spring Dayton
Hockley Kingwood
Houston MSA Health Care
Cypress Atascocita
IAH
Humble >> 128 Hospitals
Lake
Houston >> 18,681 Hospital Beds
Crosby
>> 16,070 Licensed Physicians
Mont Belvieu
>> 299,600 Health Care & Social Assistance Jobs

Katy CBD
>> 3.9% Annual Employment Growth
rookshire
Ship 330
Channel

Texas Medical Baytown


Bellaire Center 225

Pasadena
La Porte
146
Sugar Land HOU
35
EFD

Richmond Clear Lake


Pearland Galveston
Bay
35

League City

Alvin

Texas
Texas Medical Center
City Map
Hitchcock

Texas Medical Center


>> World’s Largest Medical Complex (1,300 Acres)
>> 54 Member Institutions
>> 10M Patients Annually
>> 106,000 Employees
>> 5,000 Physicians
>> 49,000 Life Science Students
>> $960 Million in Charity Care

4 Houston Research & Forecast Report | Mid-Year 2018 | Healthcare | Colliers International
Texas Medical Center Update
The Texas Medical Center Corp, the operator of the largest medical center in the world, announced plans for TMC3, a $1.5 billion
expansion. Ground breaking of the collaborative research campus is expected to begin in 2019 with a 2022 estimated completion date,
and involve five founding institutions seeking collaboration between major corporations and research universities. The campus is expected
to create 30,000 new jobs and has an estimated economic impact of 5.2 billion dollars annually.

Texas Medical Center Member Institutions


Baylor College of Medicine Nora’s Home
CHI St. Luke’s Health Prairie View A&M University
Children’s Memorial Hermann Rice University
City of Houston Department of Health and Human Services Ronald McDonald House Houston
Coleman HCC College for Health Services Sabin Vaccine Institute
DePelchin Children’s Center Shriners Hospital for Children – Galveston
Gulf Coast Regional Blood Center Shriners Hospital for Children – Houston
Harris County Institute of Forensic Sciences St. Dominic Village
Harris County Medical Society Texas Children’s Hospital - Largest U.S. Children’s Hospital
Harris County Public Health and Environmental Services Texas Heart Institute
Harris Health System Texas Medical Center Hospital Laundry Cooperative Association
Health Science Center Texas A&M University Texas Medical Center YMCA
Houston Academy of Medicine Texas Southern University
Houston Hospice Texas Women’s University
Houston Methodist The Health Museum: John P. McGovern Museum of Health and Medical Science
Institute for Spirituality and Health The Texas Medical Center Library
LIfeGift Thermal Energy Corporation (TECO)
MD Anderson Cancer Center - World’s Largest Cancer Hospital TIRR Memorial Hermann
Memorial Hermann University of Houston
Menninger Clinic University of St. Thomas
Michael E. Debakey High School for Health Professions UT Health
Michael E. Debakey Veterans Affairs Medical Center UTMB Health

TMC is home to
the World’s Largest
Children’s Hospital,
Texas Children’s
Hospital & the
World’s Largest
Cancer Hospital,
MD Anderson
Cancer Center.

5 Houston Research & Forecast Report | Mid-Year 2018 | Healthcare | Colliers International
Houston Healthcare Industry
In The News
According to the 2018-2019 report from the Center for World
University Rankings, six Houston-area universities and medical
schools ranked in the top 500 universities in the world.
For details, visit http://cwur.org/2018-19.php
CWUR

Mid-Year 2018 Houston Medical Office Highlights


Houston’s healthcare and social
assistance job growth slowed in the
first half of 2018 but has increased 39.7M SF
6.3% in three years. Total Inventory
12-Month Percent Change June - June
2017 – 2018 0.3% 16.9K SF
2016 – 2017 2.9% Net Absorption
2015 – 2016 3.1%
12.3%
Vacancy

22.6M SF

0.4M SF
10.0M SF 7.1M SF

Class A (25%) Class B (57%) Class C (18%)

FOR MORE INFORMATION CONTRIBUTOR


Lisa Bridges CPRC Coy Davidson
Director of Market Research | Houston Senior Vice President | Houston
+1 713 830 2125 +1 713 830 2128
lisa.bridges@colliers.com coy.davidson@colliers.com

Colliers International | Houston


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