1Q 2010 Houston Medical Office Report

8/9/2019 1Q 2010 Houston Medical Office Report

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COLLIERS INTERNATIONAL | HOUSTON MEDICAL OFFICE | 1ST QUARTER 2010

HOUSTON | 1ST QUARTER | 2010

Accelerating success.


2/7

COLLIERS INTERNATIONAL | HOUSTON OFFICE MARKET | 3RD QUARTER UPDATE 2009

Houston Medical Office Occupancy Improves in 1Q 2010

Houstons medical office market closed the first quarter 2010 with encouraging signs it isMARKET INDICATORS


1Q-09 1Q-10

MEDICAL ALL CLASSES

QUARTERLY NET ABSORPTION

94,555 SF 81,135 SF

MEDICAL ALL CLASSES

AVERAGE VACANCY

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 ofa jobless economic

recovery, medical office landlords differed by property class in adjusting their quoted rental rates

14.5% 13.1%

MEDICAL ALL CLASSES

GROSS QUOTED RENTAL RATE

$23.07/SF $22.90/SF

MEDICAL CLASS A

in t e irst quarter. W i e t e me ica C ass average renta rate o 28.52 SF ecrease 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.

Houstons 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

$29.18/SF $28.52/SF

MEDICAL CLASS A

AVERAGE VACANCY

17.2% 14.9%

un er construct on t roug t e en o ay re eve t e pressure n ng t e

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, Houstons 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

OB GROWTH & UNEMPLOYMENT

eas ng, ue pr mar y o a so vers e ase o grow n us r es. ous on s pro ec e o

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.

ABSORPTION, NEW SUPPLY & VACANCY RATES

Medical Office Space

APR. 09 APR. 10

USTON -1.6% job growth

40,900 jobs lost

7%

9%

11%

13%

15%

17%

-

0

100,000

200,000

300,000

400,000

500,000

,EMPLOYMENT 6.7% 8.4%

XAS-0.3% job growth

33,400 jobs lost

EMPLOYMENT 6.8% 8.1%

-1.0% job growth

5%-200,000

,

Absorption New Supply Vacancy

Q1-08 Q2-08 Q3-08 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10

1.3M jobs lost

EMPLOYMENT 8.6% 9.5%


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Occupancy & Availability

Houstons medical office occupancy

Absorption & Demand

Houston medical buildings recordedass A

Class B12.3MSF

classes, with the citywide average reaching

86.9%, representing an increase of 140

basis points (bps) from the 85.5% in 1Q

2009.

By property class, medical Class A

occupancy posted the strongest increase of

,

2010, marking the sixth consecutive

quarter of positive absorption citywide.

a year-over-year basis, this fell below the

94,555 SF of net absorption gains recordin 1Q 2009. It is notable that the 2009

annual medical office net absorption

2.7%52.9%

lass C.7MSF

230 bps to 85.1% in 1Q 2010, compared to

82.8% in 1Q 2009. Class B occupancy

increased 130 bps to 86.5% (from 85.2%),

while Class C rose 70 bps to 89.5% (from

88.8%).

Sublease space has not played a significant

role in current medical office vacant space

, ,

gains recorded since 2005.

Net absorption gains from medical tenan

with less than 25,000 SF dominated in t

1Q 2010, led by the following move-ins:

DaVita Medical Center Dialysis 18,500

at 5610 Almeda Genoa (South submark

24.4%

Class A Class B Class C

MEDICAL OFFICE

NET ABSORPTION BY CLASS

on the market, remaining below 1% oftotal vacancy over the past five consecutive

years. Of the 3.0M SF of vacant space on

the market at the end of 1Q 2010, only

45,000 SF (or 0.2% of total vacant space)

represented sublease space. By property

class, medical Class A vacant space totaled

Texas Children Pediatric Associates

10,000 SF at 4110 Bellaire Boulevard

(Bellaire submarket); and At Home Care

7,000 SF at 650 N. Sam Houston Parkw

(Greenspoint/North Belt submarket).

0,000

0,000

0,000

0,000

0,000

0,000

0,000

776,622 SF, with 10,554 SF of sublease

space. Medical Class B vacant space totaled

787,176 SF, with sublease space accounting

for 34,304 SF.

Disciplined medical office development

activity has helped prevent major upheavals

enta ates

Quoted full-service rental rates for all

medical office property classes averaged

$22.90/SF in 1Q 2010, representing a

slight decrease of 0.7% from the $23.07/in 1Q 2009. While the rate of decrease

slowed significantly, downward pressure

0,000

0,000

0

0,000

0,000

Class A Class B Class C

Q1-09 Q2-09 Q3-09 Q4-09 Q1-10

. - - ,

the market has added only 190,179 SF of

new medical space citywide. Of the five

projects delivered this year, four are located

in Fort Bend County and one in The

Woodlands. Long recognized as a strong

regional hospital in Richmond, Texas,

MEDICAL OFFICE

CLASS A & B VACANCY VS. RENTS

$30

$32

%

%

rental rates is expected to continue throu

2010, with current market trends

suggesting rental rates are not likely to

reach bottom until late this year, at the

earliest. As with non-medical office spac

medical building landlords continued to

increase lease concessions, including free

medical office buildings in Fort BendCounty with a combined total of 109,585

SF. Medical office buildings currently

under construction total 195,467 SF with

three of the four projects slated for delivery

by year end 2010. The largest project

underwa is the 85 6 SF West reen$20

$22

$24

$26

$28

%

%

%

%

% rent and generous tenant improvement

packages, by way of attracting and

retaining credit-strong tenants.

By property class, the medical Class A

average quoted rental rate fell 2.3% in 1

2010, on a year-over-year basis, to

28.52 SF from 29.18 SF while the

Professional Building located at 750

Westgreen (Katy Freeway submarket) and

scheduled for completion by August 2010.

1 Q- 09 2 Q- 09 3 Q- 09 4 Q- 09 1 Q- 10

Class A Vacancy Class B Vacancy

Class A Rents Class B Rents

Class B rental rate at $21.90/SF and Cla

C at $18.28/SF increased by 1.3% and

2.3%, respectively.


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Leasing Activity

Houstons medical office leasing activity

reached 88 8 2 SF in 1 2010 com ared

Sales Activity

Medical office investment sales activity in

-

142,226 SF in 1Q 2009. By property class

Class B medical office buildings led the

market with 43,346 SF leased, compared t

51,922 SF one year earlier. Class C medicbuildings also improved with 34,327 SF

leased in 1Q 2010, up from 22,569 SF in

2009. In contrast Class A medical buildin

recession period, with fewer quality

buildings on the market and the lack of

available credit still the primary factors

keeping transaction activity low. Seventransactions were recorded year-to-date

through the end of May 2010 with a total

dollar volume of 21M avera in 200

ar Land Medical Building II

400 Southwest Freeway

Fort Bend/Sugar Land Submarket

posted a drop in leasing activity with 11,16

SF in 1Q 2010, well below the 68,000 SF

recorded in 1Q 2009.

Year-to-date leasing activity was also weak,

with the only 25,000+ SF lease representin

sale-leaseback transaction. The 1960 Fami

per SF with a 9.0% capitalization rate.

Below are select significant medical office

building sales closed year-to-date through

May 2010: Healthcare Trust of America

acquired the 60,300 SF Sugar Land

Medical Building II (15400 Southwest

RBA: 60,300 SF

Built: 1999

novated: 2005

Buyer: Healthcare Trust of America

Seller: Mission Sugar Land II, LP

le Date: March 2010

ract ce roup ease , n t e

FM 1960 medical office building (FM

1960/I-45 North submarket) in May 2010.

Among other medical office leases

transactions recorded year-to-date, Texas

Children Pediatric Associates signed a new

10,000 SF lease at 4110 Bellaire Boulevard

Freeway) from Mission Sugar Land II for$12.4M or $206/SF. Built in 1999 and

renovated in 2005, the property was 100%

leased at time of sale.

Broadstone Net Lease purchased the

38,513 SF FM 1960 Medical Center

buildin 837 FM 1960 from FM 1960medical building (Bellaire submarket) in

March 2010.

Key medical office renewals year-to-date

included Memorial Hermann Hospital

Systems 7,600 SF lease at 1650 E. Windin

Way medical building (NASA/Clear Lake

submarket in Ma 2010.

Medical Village Physicians for $8.5M or

$219/SF. The purchase represented a sale-

leaseback transaction.

Among the more significant medical officebuildings under contract at the end of May

2010 was the 204,821 SF Peakwood II

1960 Medical Center

FM 1960

1960/I-45 North Submarket

RBA: 38,513 SF

Built: 2002

HOUSTON MEDICAL OFFICE MARKET SUMMARY

.

Overall leasing activity is expected to

continue improving over the next twelve

months.

Professional Building (800 Peakwood

Drive) in the FM 1960/I-45 North

submarket for $16.7M or $82/SF. Built in

1984, the property is currently 95% leased.

uyer: roa stone et ease

Seller: FM 1960 Medical Village

Physicians

ale Date: May 2010

ource: Costar Group

Net Absorption Rent

MedicalOfficeClass

TotalInventory

Sq. Ft.

DirectVacantSq. Ft.

DirectVacancy

Rate

SubleaseVacantSq. Ft.

SubleaseVacancy

Rate

TotalVacantSq. Ft.

Q1 VacancyRate

Q4 VacancyRate

Q1 NetAbsorption

Sq. Ft.

YTD NetAbsorption

Sq. Ft.

Wgtd. AvQuoted

Rate

A 5,270,971 776,622 14.7% 10,554 0.2% 787,176 14.9% 15.2% 62,062 62,062 $28

B 12,269,621 1,619,929 13.2% 34,304 0.3% 1,654,233 13.5% 13.2% 9,454 9,454 $21

C 5,671,037 597,224 10.5% 0 0.0% 597,224 10.5% 10.7% 9,619 9,619 $18

Total 23,211,629 2,993,775 12.9% 44,858 0.2% 3,038,633 13.1% 13.1% 81,135 81,135 $22

ource: Costar Group


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Medical Office Development Pipeline

e ec n er ons ruc on e ca ce u ngs

Submarket Building Name Building Address Square Feet % Leased Developer

Estimated

Delivery

Katy Freeway West Westgreen Professional Building 750 Westgreen 85,467 37.26 Kingsland Westgreen Inv LLC Aug-10

The Woodlands College Park Medical Building College Park Dr & Greenbridge 75,000 0 Woodlands Land Development Jan-11

FM 1960/I-45 North Northwest Diagnostic Imaging 1140A Cypress Station Dr 23,000 100 Northwest Diagnostic Imaging Jun-10

NASA/Clear Lake Clear Lake Medical Condominiums 300-390 East Medical Center 12,000 0 Huffman Builders Jul-10

Total medical office properties under construction listed above 195,467

Select Medical Office Building Deliveries - 2010

Submarket Building Name Building Address Square Feet % Leased Developer Delivered

Southwest Outlier OakBend Doctors Center - Grand Parkway 7830 W Grand Pky S 60,000 68.62 McShane Development Company Apr-10

Southwest Outlier OakBend Doctors Center - Southwest Freewa 22001 Southwest Freeway 49,585 52.54 McShane Development Company Apr-10


Woodlands 1111 Medical Plaza 1111 Medical Plaza Dr 30,000 85.24 n/a Mar-10

E Fort Bend Co/Sugar Land 1235 Lake Pointe Parkway Medical 1235 Lake Pointe Parkway 26,594 8.02 n/a Jan-10

E Fort Bend Co/Sugar Land 1400 Creekway Medical Building 1400 Creekway Dr 24,000 50 Lake Pointe Town Center Ltd. Jan-10

Total medical office properties delivered year-to-date listed above 190,179


Conroe Sadler Clinic 1304 I-45 70,042 100 Sadler Clinic Jul-09

NASA/Clear Lake West Building 253 Medical Center Blvd 48,000 100 Jacob White Construction Sep-09

Woodlands Medical Professional 4185 Technology Forest Dr 45,000 88.79 Woodlands Land Development Jun-09

Northwest Outlier Tomball Medical Building 647 James St 22,100 0 James Medcom I Ltd. Mar-09

E Fort Bend Co/Sugar Land Fort Bend Heart Center 13020 Dairy Ashford Rd 20,000 45 Southwest Medical Village Aug-09

Southeast Outlier 1305 W Parkwood Ave 14,500 29.66 Heritage Erectors Development Jan-09


FM 1960/Hwy 249 10807 Huffmeister Medical Building 10807 Huffmeister Rd 10,000 41 KM Realty Advisors Jun-09

Total medical office properties delivered listed above 229,642


South Main/Medical Center Life Science Plaza 2130 W Holcombe Blvd 300,000 62.67 The Metrontario Grou Ma -08 , .

E Fort Bend Co/Sugar Land Sugar Land Medical Plaza 1327 Lake Pointe Pky 120,596 72.95 Medistar Corporation Aug-08

Woodlands Pinecroft Professional Center, Bldg. 4 9305 Pinecroft Dr 80,500 100 n/a Dec-08

South Bldg C 1920 Country Place Pky 72,000 36.11 Riverway Commercial Development Aug-08

Northwest Outlier Tomball Medical Plaza 506 Graham Dr 55,000 79.83 n/a Dec-08

FM 1960/Hwy 249 Woodwill Medical Offices 13802 Centerfield Blvd 45,000 100 Woodwill Medical LLC Dec-08

NASA/Clear Lake Friendswood Medical Center 1505 E Winding Way 28,407 85.73 Lestin Partners Nov-08

E Fort Bend Co/Sugar Land 1437 Highway 6 23,911 83.38 Indermuehle & Company Jul-08

South Main/Medical Center Kirby Glen 2453 S Braeswood Blvd 23,000 36.96 KB Centre Ltd. Sep-08

Gulf Freeway/Pasadena 5010 Crenshaw Medical Building 5010 Crenshaw Rd 21,000 100 Crenshaw Medical Properties Jun-08

Southwest Outlier Corner of Mason 5131 S Fry Rd 14,000 85 Mason Project Ltd. Mar-08

Northwest Outlier Tomball Medical Park 455 School St, Bldg. 4 10,000 100 Cy-Fair OSM Properties Dec-08

Total medical office properties delivered listed above 793,414


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TEXAS MEDICAL CENTER

The Texas Medical Center (TMC) the worlds largest medical center represents one of Houstons major economic drivers and core

industries with an estimated regional annual economic impact of $14 billion. TMC is also one of Houstons largest employers with

92,500 employees, including physicians, scientists, researchers and other advanced degree professionals in the life sciences.

The internationally-renowned, 1,000-acre TMC is the worlds largest medical complex with 48 member institutions, including leading

medical, academic and research institutions, all of which are non-profit and dedicated to the highest standards of research, education

and atient and reventive care. Member institutions include 13 hos itals and two s ecialized atient facilities as well as 19 renowned.

academic and research institutions virtually covering all health-related careers including two medical schools, four nursing schools, as

well as schools of dentistry, public health, and pharmacy and 15 support services organizations. Over 69,000 students including

more than 5,000 international students are affiliated with TMC, including high school, college and health profession graduate

programs. More than 5.5 million patients visited in 2009, including approximately 18,000 international patient visits.

In addition to the medical facilities and institutions of higher

learning, TMC is also home to more than 100 professionaloffice buildings. Overall, the complex covers over 18 miles of

public and private streets and roadways, with 31 million square

feet of existing patient, education, and research space.

TMC has continued to grow and expand over the past several

decades with the majority of growth occurring in the past ten

years. In 2006, TMC completed a 50-year Master Plan which

includes nine major initiatives for future institutional growth

and physical improvements designed to further strengthen the

campus. In 2007, the University of Texas M.D. Anderson

Cancer Center began construction of the Center for Advanced

Biomedical Imaging Research. The Center is located in the

desi110-acre Universit of Texas Research Park, a oint effort between the Universit of Texas Health Science Center, M.D. Anderson and

The University of Texas M.D. Anderson Cancer Center

Texas Childrens Hos ital

TMC Patient Care Institutions

Baylor College of Medicine

The Universit of Texas Health Science Center at Houston

TMC Academic and Research Institutions

General Electric Healthcare. In terms of future growth, TMC has approved $7.1 billion in building and infrastructure investments

between 2008 and 2012, with annual research expenditures estimated at $1 billion.

Memorial Hermann Hospital System

The Methodist Hospital

St. Lukes Episcopal Hospital

Lyndon B. Johnson General Hospital

Quentin Mease Community Hospital

Ben Taub General Hospital

The Institute for Rehabilitation and Research

The University of Texas M.D. Anderson Cancer Center

University of Houston College of Pharmacy

Rice University

Texas A&M University Health Science Center

Prairie View A&M University College of Nursing

Texas Womans University Institute of Health Sciences

Texas Southern University College of Pharmacy and

e osp ce at t e exas e ca enter

Texas Heart Institute

Shriners Hospitals for Children Houston

Veterans Affairs Medical Center in Houston

ea t c ences

Harris County Psychiatric Center

Houston Academy of Medicine


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480 Offices Worldwide

NORTH AMERICA

EUROPE AND

MIDDLE EAST

HAWAII

SOUTH

AMERICA

AFRICA

ASIA PACIFIC

AUSTRALIA

61 Countries on 6 Continents

133 AMERICAS

94 USA

22 CANADA

17 LATIN AMERICA

COLLIERS INTERNATIONA

1300 Post Oak Blvd, 2nd Floo

Houston, Texas 7705

Main: 713.222.21

Fax: 713.830.21

www.collierstexas.co

64 ASIA/PACIFIC

97 EUROPE/MIDDLE

EAST/AFRICA

$1.6 BILLION IN GLOBAL

REVENUE

1.1 BILLION S UARE FEET

UNDER MANAGEMENT

15,000 PROFESSIONALS

Accelerating success.

1Q 2010 Houston Medical Office Report

Documents

Transcript of 1Q 2010 Houston Medical Office Report