Healthcare Trends

Houston’s healthcare industry remains strong and continues to be a major driver of development and employment. More than 325,000 Houstonians work in healthcare, the city’s second largest employment sector.

From December ’14 to October ’16, a period when mining and logging lost nearly 25,000 jobs due to the energy downturn, health care created nearly 23,000 new jobs. Houston can expect to see more health care growth and more jobs, according to the Greater Houston Partnership’s 2017 Houston Employment Forecast.

Recent job cuts announced by one of Houston’s major hospital systems, M.D. Anderson, are not reflective of the overall strength of the local healthcare market. Despite the uncertainty surrounding the Affordable Care Act and rising costs in every facet of the industry, healthcare real estate fundamentals remain solid and the industry will likely remain buoyed by consumer demand.

There are more than 5 million square feet of new hospitals and expansions and medical office buildings currently under construction in the Greater Houston area. These include major expansions in the Texas Medical Center and a wave of new development in the suburbs. Healthcare tends to follow population growth similar to retailers and as Houston’s population has moved to the suburbs, healthcare providers have followed.

Houston Methodist Hospital will deliver a 1 million square foot expansion in the Texas Medical Center and a 470,000 SF hospital in The Woodlands in 2017. In addition, Memorial Hermann will complete the 321,000 SF Cypress Medical Center in 2017. These are just a few examples of the multiple hospital construction projects underway around the Houston metro.

On the leasing front Houston Healthcare Systems are continuing to expand services and market share in suburban locations establishing clinical locations in new medical office buildings and highly visible retail locations with attractive demographics.

Vacancy & Availability

Houston’s medical office market occupancy decreased slightly during the second half of 2016 with the citywide average vacancy rate increasing 20 basis points to 12.4% from 12.2% in Q2 2016. Sublease space has not had a significant impact on current vacancy rates. Of the 4.3M SF of vacant space on the market, only 117,127 SF or 0.3% is sublease space.

Disciplined healthcare development activity has helped prevent major upheavals in current vacancy levels. There were six new buildings ( SF) added to the market during the second half of 2016. Currently, there are twelve buildings totaling 599,285 SF under construction. The largest medical office building currently under construction is the 172,000-SF Class A Memorial Hermann The Woodlands Medical Plaza 4 located in The Woodlands submarket on Pinecroft Dr. The 6-story building is expected to deliver in August 2017.

Absorption & Demand

Houston’s medical office market recorded 43,787 SF of positive net absorption in the second half of 2016, bringing the year-end 2016 total to 372,979 SF. By property class, Class B posted the largest amount of positive net absorption in the second half of 2016, posting 58,893 SF of positive net absorption while Class A posted negative net absorption.

Leasing Activity

Houston’s medical office leasing activity, which includes renewals, reached 464,903 SF in the second half of 2016, pushing the year-end 2016 total to 949,736 SF.

Sales Activity

Houston’s healthcare investment sales activity included 28 transactions, with an average price per square foot of $247 and an average cap rate of 6.7%.

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