TEXAS MEDICAL BUILDING MARKET DATA 2023
The Texas economy is flourishing, and nowhere is that better reflected than in the state’s dynamic healthcare industry. Medical construction projects, job opportunities and billions in revenue are evidence of the Texas healthcare boom, and this boom correlates with population trends in the state.
Texas has the second-largest population in the United States. The state also ranks first for the largest annual population growth. According to the most recent estimates from the U.S. Census Bureau, this growth trend will continue. The expansion of existing hospitals and the construction of new medical facilities is part of the response to this trend.
The rapidly growing Dallas market is seeing a surge of expansions around specialty care and Texas’ first and only Sarah Cannon Cancer Hospital. The value of outcomes-based contracting is growing more apparent in Dallas, where Baylor Scott & White and Texas Health Resources operate top-ranking ACOs, and Genesis Physicians Group recently launched the market’s first Medicaid ACO.
The Dallas-Fort Worth medical office market finished last year with robust performance. Users continue drawing down space, particularly in quality MOBs, bringing vacancy to multi-year lows of 10.0%. Rent growth is accelerating, with some properties experiencing double-digit increases, as available space dwindles and inflation continues pressuring costs. Tightening vacancy and rent growth are positive signs for new development, but rising interest rates and tightening credit conditions make financing challenging. As a result, construction levels have fallen to their lowest levels in over a decade.
While square footage under construction and 12-month deliveries are down compared to a year ago in the medical office space, those figures could soon be trending in the opposite direction. Vacancy rates in DFW are at 10.2 percent and were 11.6 percent one year ago. Gross rents are also up nearly 3 percent compared to a year ago.
Tenants took down more than 135,000 square feet last quarter to top off a year of demand exceeding 370,000 square feet for 2022. The Woodlands, Inner Loop, and TMC made gains to no surprise given the population growth, and demand for housing both in the urban core and growing suburbs. But Conroe, the Far, and Near West backed up by Sugar Land showed the resilience of Houston’s natural residential expansion and the need for healthcare and medical office space to support it. The metro’s job and population push is stoking new construction for healthcare and medical offices: the sector closed the year with just under 1.1 million products in the pipeline, coming off its prior 10-year peak in the third quarter as projects delivered with healthy pre-lease commitments. These deliveries had no impact of vacancy as tends the case. In fact, vacancy shrank by 10 basis points this quarter to a neat 13.1 percent – a solid figure for both occupiers and owners. Heading into the new year, Houston’s jobs scene is equally on such a footing with gains projected to be significant in line with the area’s long-term average.
The labor market proved to be a resilient stabilizer in 2022 for a U.S. economy facing the highest inflation in four decades. On a local level, Houston’s metro unemployment was 3.9 percent in December, down from 4.8 percent over a year ago and declined steadily since peaking in April 2020. In its most recent full release, Houston’s core inflation rate was 7.6 percent over the year according to the U.S. Bureau of Labor Statistics, outpaced by the U.S. November 2022 figure of 6.0 percent. Houston’s core rate continues to track above that of the U.S. mainly due to higher local prices for everyday items, such as groceries and restaurant meals, with smaller prices for housing, apparel, and vehicles.
Overall direct vacancy marked off 10 basis points down to 13.1 percent, as Houston’s healthcare sector experienced increased leasing activity quarter-over-quarter, but also saw project deliveries that totaled just under 60 percent occupancy upon completion.
Houston’s on-campus properties remained flat over the period at 11.7 percent, but it should not go unnoticed that the building group experienced a year-over-year decrease of 1.2 percent from the same time last year. Area vacancy was consequently maintained lease activity in the Inner Loop and Conroe submarkets quarter-over-quarter. Shifting towards off-campus, these medical office facilities saw direct vacancy decrease 10 basis points to 14.3 percent over the 90-day period, with the most notable tightening in marketed space from the Conroe submarket where direct vacancy decreased from 11.1 percent to 7.2 percent in the fourth quarter. Two properties experienced move-ins with the largest contributor, Conroe Medical Plaza, leasing 8,000 square feet.
The forecast for the remainder of 2023 is still uncertain when considering rising debt costs, loan maturities, and increasing financial scrutiny from banks to landlords, and landlords to tenants. However, San Antonio’s medical office market remains favorably positioned, despite the anticipation of economic headwinds. San Antonio’s population growth, declining unemployment rate, low cost of living, and nationally low rental rate, make it an attractive market for tenants and investors.
This quarter has continued to see major expansion and funding initiatives from the University Health System, Baptist Health System, Methodist Healthcare, Texas Biomedical Institute, and The University of Texas Board of Regents.
This quarter has continued to see major funding and expansion plans for the healthcare industry. Methodist Healthcare is planning a $150 million hospital in the Westover Hills area located in the Far West submarket. Additional activity in the Far West submarket includes the Texas Biomedical Research Institute, also known as Texas Biomed, receiving a federal designation allowing access to a portfolio of up to $100 million in funding from The Biomedical Advanced Research and Development Authority (BARDA).
There is 218,823 SF of medical office under construction in San Antonio, spread over eight buildings, and five submarkets. The largest construction project is OneFiftyOne Medical Office; a 60,000 SF, 2-story, Class A building, located in Westover Hills.
One of the most notable deliveries was the Oak Hills Women’s Pavilion, located in the Core Medical Center. Oak Hills Women’s Pavilion (Transwestern as landlord representative) is a 95,224 SF, 4-story, Class B medical office building with one 14,755 SF vacancy remaining. In addition, the University Health Women’s and Children’s Hospital, a 12-story, 300-bed hospital, is anticipated to deliver in Q2 2023. The construction pipeline for the medical offices is anticipated to slow down over the course of 2023 due to high-interest rates on construction loans, a reduction in construction jobs, and increases in maintenance costs.
As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.