Houston Medical Office Building Absorption Catching Up To Construction
Houston is on the tail end of a busy medical office building development cycle, giving absorption some time to catch up and vacancy a chance to level off.
The medical office sector saw 289K SF of net absorption in 2022, which is 50% higher than the five-year average, according to a new report from JLL. About 56K SF of that absorption happened in Q4, indicating absorption slowed toward the end of the year.
There is another 527K SF of medical office space under construction, the report shows. JLL tracks medical office buildings over 20K SF, not including hospital space, to compile the data for the report.
Recent absorption "has been flat, because we've had buildings across the city that started construction about two years ago, and they're delivering at a similar pace to the amount of growth that we've had,” said JLL Managing Director Chris Wadley, who leads the Gulf Coast region for healthcare, life sciences and higher education practices.
“So in other words, if you're a tenant, and you're moving into a new building, or you're opening a new practice, you might be closing one down behind, or you might be relocating it.”
The movement to newer, nicer medical office buildings is reflected in the discrepancy in vacancy between Class-A and Class-B buildings. Overall vacancy was 15.9% in Q4, down substantially from the 17.4% Partners reported about a year ago. Class-A vacancy was 11.4% in Q4, while Class-B was at 18.7%, according to the JLL report.
“We've got tenants that are leaving those B buildings and moving into A buildings, if they can afford it,” Wadley said. “Most medical office developers are pretty savvy with real estate. And so they know that if they build a building, they're going to lease it up. And it's going to come maybe from Class-B buildings.”
There are still deliveries of Class-B medical office buildings happening, though far fewer than Class-A, at 379K SF and 104K SF, respectively, for all of 2022. Class-A gets a higher average asking rent and had 1.2% growth in Q4, bringing it to $31.91 per SF versus $24.92 SF for Class-B.
Total deliveries were 482.5K SF for the year, up from 2021, but slightly fewer than 2022.
“The development cycle really was starting pre-pandemic and then it accelerated because of the pandemic because of substantial population growth in the metro,” Wadley said. “That's why medical office gets built, because of population growth.”
Kelsey-Seybold, for example, opened a 125K SF campus in the Memorial/Spring Branch area in August. The system also has a 165K SF campus in Springwoods Village expected to open this summer, with additional expansions underway at Clear Lake and Fort Bend locations.
Even if tenants move out of Class-B medical office buildings, conversions to other assets are unlikely, Wadley said. Class-B medical office rents are still higher than Class-B retail rents, he said, adding owners are more likely to invest in upgrades of a medical office space than convert it to another use.
Wolf Capital Partners, for one, announced last month that it is making extensive upgrades to the 122K SF HeightsMED at 427 West 20th St., with plans to make it the only Class-A medical office in the Heights.
