Signs of health in medical office market

January 29, 2019

The market for medical office space stands like a lonely island in a sea of vacant commercial space.

As 2018 came to a close, Houston’s office vacancy rate stood at 22 percent. Some 45 million square feet of office space lay vacant throughout the area — the equivalent of 134 Astrodomes.

“Twenty-two percent feels like there are oceans of space,” Jon Lee, executive vice president of the commercial real estate company CBRE, said last week.

But while fluctuating oil prices have kept commercial vacancy rates high, one segment of the office market that has been growing steadily. The inventory of medical office space is on track to increase by 1 million square feet this year, a marked spike in a market that saw less than 4 million added over the last eight years. The vacancy rate for medical office space stands at 11 percent.

An aging population and increasing percentage of insurance holders has driven demand of medical office space — especially in Houston, where the population is already growing quickly. Nationwide, the number of people aged 65 and over increased by more than 25 percent between 2010 and 2017, according the CBRE. At the same time frame, the number of people without health insurance was cut nearly in half.

These trends have combined to create a strong demand for medical offices, which have different mechanical, electrical and plumbing requirements than traditional offices. These specialized spaces have half the vacancy rate of the Houston office market overall.

Investors and developers alike have taken notice.

“We’ve had some very big, notable transactions — very high-profile assets that were traded at record-breaking numbers,” said Brandy Bellow Spinks, a member of CBRE’s Healthcare Services Group. For example, 6400 Fannin St. in the Medical Center Area was sold in July to LaSalle Investment Management by Mischer Investments for $405 million, or $793 per square foot.

“Investors are bullish on medical office because of the nature of it being more recession-proof than some of the other sectors,” Bellow Spinks said.

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.

The new projects include the 101,744-square-foot Memorial Medical Pavilion near Katy Freeway and the 58,000-square-foot Vision Park Medical Building in Shenandoah.

“Fortunately for us, patients are going to need care,” Bellow Spinks said. “I think you’ll see steady growth.”



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