Houston Medical Office Report: Mid-Year 2013

by CoyDavidson on August 13, 2013

Houston Methodist

Houston’s Medical Office Market Vacancy Drops 160 Basis Points in the First Half of 2013

Houston medical office buildings recorded 467,000 SF of positive net absorption in the first half of 2013, the majority of which (365,000 SF) occurred in the first quarter. By property class, Class A posted the largest amount of positive net absorption in the first half of the year, followed by Class C properties, posting 393,000 SF and 65,200 SF, respectively. The citywide average vacancy rate decreased 160 basis points and the average quoted rental rate decreased slightly to $23.02 from $23.11 per SF between December 31, 2012 and June 30, 2013.

Houston’s medical office market is expected to benefit from both shortand long-term regional trends. Disciplined development, with only 6 new buildings added to inventory in 12 months, will relieve the pressure in filling the existing vacant lease space.

Overall, Houston’s economy remains among the strongest in the U.S. The Houston metropolitan area added 91,600 jobs between May 2012 and May 2013, an increase of 3.4%, Further, Houston’s unemployment fell to 6.4% from 6.8% one year ago and area home sales increased significantly, growing by 28.0% over the year.

medical office

Vacancy & Availability

Houston’s medical office market occupancy increased during the first half of 2013 with the citywide average vacancy rate decreasing by 160 basis points to 11.3% from 12.9%.

By property class, Class A vacancy rates posted the largest decrease during the first half of 2013, 530 basis points to 8.5% from 13.8% in 4Q 2012. Class C vacancy rates decreased 130 bps to 11.2% from 12.5%, while Class B vacancy rates increased 20 basis points to 12.8% from 12.6%.

Sublease space has not had a significant impact on current vacancy rates, remaining below 0.5% of total vacant space over five years. Of the 3.0M SF of vacant space on the market at mid-year 2013, only 50,700 SF was sublease space.

Disciplined medical office development activity has helped prevent major upheavals in current occupancy levels. There were only eight (8) new buildings (1.2M SF) added to the market during 2012 and just one (1) building (30,000 SF) delivered in the first half of 2013. The largest project completed within the past two years was the University of Texas MD Anderson Cancer Center Administration Building located at 7007 Bertner Avenue in the Texas Medical Center (895,600SF owner occupied).

Currently, the medical office construction pipeline is empty.

Absorption & Demand

Houston’s medical office market recorded 467,400 SF of positive net absorption in the first half of 2013.

By property class, Class A posted the largest amount of positive net absorption in the first half of 2013, with 393,176 SF, followed by Class C properties posting 65,237 SF of positive net absorption. Class C posted only 8,986 SF of positive net absorption in the same period. Most of the Class A absorption occurred in Q1 2013 when MD Anderson moved in it’s new building on Bertner Avenue in the South Main/Medical Center submarket.

Rental Rates

Quoted full-service rental rates for all medical office property classes averaged $23.02 per SF at mid-year 2013, a decrease from $23.13 per SF recorded year-end 2012. Medical office building landlords continued to offer lease concessions including free rent to credit worthy tenants, but have decreased the amount of tenant improvement packages.

By property class, on a bi-annual basis, the average Class A rental rate of $28.40 per SF decreased from $29.35 per SF, Class B increased to $22.91 from $22.77per SF, and the average Class C rate increased from $17.21 to $17.83 per SF.

Sales Activity

Transaction activity remained slowed slightly between year-end 2012 and mid-year 2013, with 30 properties changing hands compared to 57. According to CoStar Comps, Houston medical building sales transactions in the first half of 2013 had a total dollar volume of $46.3M, averaging $297 per SF with a 6.5% capitalization rate. Many of the transactions were multi-property portfolio sales, however, there were several single property transactions that occurred.

The 46,380 SF 290 Medical/Office Plaza in the FM 1960/Hwy 249 submarket was purchased by the Bronner Family Trust in January for $9.6M. The 30,000 SF Memorial Hermann Covenant Care Building in the Northeast Near submarket was purchased by American Realty Capital Healthcare Trust, Inc. for $13.3M.

There are currently 116 properties listed for sale and 4 pending transactions.

You can view and download the full report here.

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