Signs of health in medical office market
Driven by demographics and a robust care sector, it’s a bright spot in city plagued by lackluster demand
When David Schreiber, managing director of acquisitions for the real estate investment company LaSalle Investment Management, caught wind last March that the Memorial Hermann Medical Plaza building in the Texas Medical Center was going on the market, he jumped into action.
By July, LaSalle had closed on its purchase of the 510,000-square-foot building, which, at $405 million — $794 a square foot — set a record for a medical office sale in the U.S.
“I knew it was a real special one,” Schreiber said.
“In many cases, office buildings can be commodities — after the expiration of their leases, tenants can be indifferent of whether they stay in one building or the one next to it,” he said. “Medical office tenants act in a very different way. They tend to stay for a very long time.”
Indeed, at the time of the sale, the then-10-year-old building was 99 percent occupied. Memorial Hermann, which was part of the ownership group that sold the property, has long-term leases for about 65 percent of the space in the building.
The deal was reflective of a market for medical office space that is a bright spot in an otherwise lackluster Houston office environ-
ment. The city closed 2018 sporting an overall office vacancy rate of 22 percent, about 45 million square feet — the equivalent of 134 Astrodomes. Medical office space boasted a far healthier 11 percent vacancy.
That strength is expected to continue, driven by demographics and a robust health care sector.
Census estimates show Houston’s health care sector grew by 7 percent between 2015 and 2017, adding 16,000 jobs. Growth in the sector outpaced the region’s overall 5 percent job growth in the same period.
As a result, the demand for buildings catering to medical users — generally equipped with the mechanical, electrical and plumbing infrastructure necessary for doctors’ offices or research labs — has been increasing at a steady rate, even as fluctuating oil prices have created uncertainty in the rest of the Houston office market.
Filling the void
That demand has kept developers busy. Houston has 1 million square feet of medical office space either under construction or in the late planning stages, according to the commercial real estate company CBRE. That’s a marked spike in a market that saw less than 4 million square feet of the product added over the last eight years.
Much of the space coming on line this year is already leased. In its fourth quarter report on Houston’s medical office market, real estate services company Transwestern projected demand would stay strong through 2019.
“With continued user demand and piqued developer interest, the outlook for the health care sector looks bright,” the report said. “As demand in suburban markets remain strong, developer activity is anticipated to increase. Nearly 300,000 square feet of medical office space is set to deliver throughout 2019, at 43.4 percent preleased.”
Demographics and a dynamic research and development environment are driving the activity.
An aging population and more people covered by health insurance has driven demand for doctors’ offices — especially in Houston, where the population is already growing quickly. In the Houston area, the number of people ages 65 and older increased by 25 percent between 2013 and 2017, according to Census estimates. And CBRE says the number of people without health insurance has halved since 2010.
But what sets Houston’s medical office space apart for many life science and medical users is the Texas Medical Center.
Though the medical office market in Houston is spread among several geographies, the 1,345-acre Texas Medical Center dominates. It claims to be the eighth-largest business district in the U.S., generating about $25 billion in economic activity annually, about the same as the economies of Boulder, Colo., or Spokane, Wash.
“There are a few locations in the U.S. that are very special locations for health care,” LaSalle’s Schreiber said. “And the Texas Medical Center is the largest.”
The Medical Center employs 106,000 people, according to the Houston First Corp., and it has plans to become even bigger. In 2018, its leadership announced plans to collaborate with Baylor College of Medicine, Texas A&M University Health Center, University of Texas Health Science Center and University of Texas MD Anderson Cancer Center to build a 30acre medical research campus that the Medical Center said will bring another $5.2 billion to the economy each year.
Jumping in
Among those seeking to take advantage is Houston’s Medistar, which last month announced it would start construction in the third quarter on a 476,500square-foot, 48-story tower on Main Street in the Medical Center that it’s calling Innovation Tower. Transwestern’s Justin Brasell, who specializes in health care advisory services and is leasing the building, said the Medical Center’s concentration of talent and investment is driving demand for life science facilities.
“A lot of technology and a lot of innovation has brewed from Texas Medical Center just because of the amount of human capital,” Brasell said. And while many of the companies that develop new medical products end up moving to life science hubs like San Francisco or Boston, Brasell said he believed the Medical Center provides unique benefits that will attract companies to high quality life science facilities in the area.
“What do these groups need?” Brasell asked. “They do a lot of testing, so they need a patient population, right? Well, the Medical Center has over 10 million patient visits a year. That’s a lot of patients in a small geography, as well as experts in those fields. It’s a perfect environment.”
More medical office space is in the works. According to CBRE, 15 projects are under construction or in the late phase of planning. Cumulatively, they will add more than 1 million square feet of medical office space to the market. That’s a huge influx for a market that saw 3.8 million square feet added between 2010 and 2018.
Buying up
That, in turn, has drawn investors such as LaSalle.
According to Real Capital Analytics, the Houston area saw $907 million in medical office investment sales in 2018, up 43 percent from the value of 2017’s sales. That year’s increase in sales values, in turn, was up 40 percent from 2017’s tally. The value of medical office sales reached just $162 million in 2014.
“Investors are bullish on medical office because of the nature of it being more recession-proof than some of the other sectors,” said Brandy Bellow Spinks, a member of CBRE’s Healthcare Services Group.
“Fortunately for us, patients are going to need care,” Bellow Spinks said. “I think you’ll see steady growth.”