Market Report: Houston Medical Office 1Q 2010

by CoyDavidson on June 7, 2010

Houston Medical Office Occupancy Improves in 1Q 2010

Houston’s medical office market closed the first quarter 2010 with encouraging signs it is nearing the end of the downward shift that began in late 2008. Medical office occupancy increased to 86.9%, 140 basis points (bps) above the 85.5% in 1Q 2009. Medical Class A occupancy increased to 85.1%, 230 bps above the 82.8% in 1Q 2009. Healthy trends in demand were also evident in the positive net absorption of 81,135 SF in 1Q 2010, marking the sixth consecutive quarter of absorption gains, with 2009 posting the highest annual net absorption since 2005. Amid ongoing concerns regarding the possibility of a jobless economic recovery, medical office landlords differed by property class in adjusting their quoted rental rates in the first quarter. While the medical Class average rental rate of 28.52/decreased 2.3% from the $29.18/SF in 1Q 2009, the Class B average rental rate at $21.90/SF and Class C average rental rate at $18.28/SF increased 1.3% and 2.3%, respectively, from 1Q 2009.

Houston’s medical office market is expected to continue benefiting from both short-and long-term regional trends. Disciplined development – with only 190,179 SF of new medical space added year-to-date (including 80,594 SF delivered in 1Q 2010), and an additional 195,467 SF under construction through the end of May – will relieve the pressure in filling the existing vacant lease space. It is not surprising that much of the new development activity is occurring in outlying suburban areas – particularly in Fort Bend County and Northwest Houston – where strong population growth trends are projected over the next quarter century

Overall, Houston’s medical office market and economy remain among the strongest in the U.S. In March 2010, Forbes ranked Houston fourth among U.S. major metros where the recession is easing due primarily to a solid diversified base of growth industries Houston is projected to easing, industries. end the year with positive job growth, albeit below previous expansion periods. With commercial real estate a lagging indicator, however, the medical office market recovery is not expected before 2011.

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