Houston Ranks No. 2 In U.S. For Outpatient Medical Construction, But New Starts Have Slowed

Demand for outpatient facilities is rising as people seek more convenient medical care, especially in high-growth Sun Belt markets like Houston, but construction of these facilities has begun to slow due to high interest rates. 

Houston has the second-highest square footage of medical outpatient buildings under construction, according to JLL’s Medical Outpatient Building Perspective released this month. 

The city is coming off of a huge development cycle that will help support its rapid population growth, said Chris Wadley, executive managing director at JLL who leads the Gulf Coast region for healthcare, life sciences and higher education practices.

“Medical buildings are not too dissimilar from retail. They follow multifamily and rooftops,” Wadley said. “As the city keeps growing, they’re going to build medical buildings that are within a 10 or 15-minute drive time radius of all the new population or new homes.”

Houston has 1.37M SF of medical office space under construction, a close second to New York’s 1.47M SF, the report states. 

This growth is supporting Houston’s prominence in the healthcare and life sciences sectors, according to the report, as well as the city’s growing outpatient volume. Houston is projected to have a 16.8% higher outpatient volume in 2027 than it did in 2022, the report found. 

But while the Houston area has seen huge growth in recent years, the increased cost of capital, construction expenses and interest rates have now largely halted construction starts, Wadley said.

The same is true across the country. U.S. medical office building starts were below 3.5M SF for all four quarters of 2023, and two of those quarters were under 2M SF — well below the pre-pandemic average of 4.5M SF, according to JLL. 

“Houston’s not insulated from that. It’s just going to slow down for a little bit on the development side,” Wadley said. “It doesn’t mean it’s a slow market, because it’s not. There’s still a lot of leasing activity. It’s a really healthy market.” 

About three quarters of Houston’s recent outpatient medical construction was from healthcare systems adding buildings for themselves on campuses around the city, he said. 

Kelsey-Seybold Clinic in 2022 launched a five-year expansion plan to place clinics no more than 10 minutes away from 95% of Houstonians. The system this month opened its expanded Fort Bend Medical and Diagnostic Center, which renovated one building and added a new 135K SF building. That will house specialty care services, a cancer center and an ambulatory surgery center, the Fort Bend Star reported.

Houston Methodist is also growing its outpatient presence around the metropolitan area. In February it bought the 32K SF Creekside Park Medical Plaza in The Woodlands, which Howard Hughes Holdings delivered last year, The Real Deal reported. It plans to open a multi-specialty clinic there, similar to its Comprehensive Care Center in Pearland, featuring primary care, physical therapy and occupational therapy providers.

These are the types of healthcare shifting toward outpatient due to technological advances, reimbursement changes and consumer preferences, the JLL report states. Yet demographics — the baby boomer generation’s aging will lead to a 50% growth in the number of Americans 80 or older over the next decade — and population growth are the largest factors fueling outpatient volume growth, the report says.

Overall inpatient population volumes are expected to decline 0.7% in the next five years as outpatient volumes will grow 10%, according to the report.

Commonly found within office buildings or retail settings, outpatient sites offer more convenience for patients, widen access to care and improve patient outcomes since they are more likely to seek care in an outpatient setting, the report says.

“Medical buildings want to be convenient to retail because people are accustomed to going to that area for shopping, H-E-B or Kroger, whatever,” Wadley said. “Then they say ‘Oh yeah, I need to go to the doctor. It’s just right here or down the street.’” 

Since this is such a firm model in Houston but the economic environment has made new construction hard to initiate, Wadley said he believes there is significant opportunity in converting other buildings to medical outpatient uses. This is already happening, he said, citing 3334 Richmond Ave. as an example. The renovated building in the Greenway Plaza area was formerly traditional office, but now has mostly medical tenants, he said. 

Retail brokers previously told Bisnow that medical offices could be a potential use for the Houston area’s soon-to-shutter 99 Cents Only Stores. Wadley said he hasn't heard of any medical plans for 99 Cents stores, but it is possible. 

“It’s happening as often as it can, because office owners that have a lot of vacancy want to figure out how to fix that,” Wadley said. “The vast majority of buildings are not suitable for conversion, but it’s happening.”