Houston Medical Office Market Slowly Recovering

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1 Q COLLIERS HEALTHCARE SERVICES GROUP - Houston Texas HEALTHCARE MARKET COMMENTARY Houston Medical Office Market Slowly Recovering Houston Houston s medical office market closed 4Q 2011 with encouraging signs that it has recovered from the downward shift that began in late Medical office vacancy decreased to 12.2%, 70 basis points (bps) below the 12.9% in 4Q Healthy COLLIERS INTERNATIONAL HOUSTON 2ND QUARTER 2010 trends in demand were also evident with positive net absorption of 153,000 SF in 4Q 2011, bringing the year-end total to 312,000 SF. The overall rental rate rose to $22.65 from $22.56 from the previous year. CITYWIDE MARKET INDICATORS 4Q-10 4Q-11 QUARTERLY NET ABSORPTION 362,036 SF 152,644 SF QUOTED RENTAL RATE NNN $22.56/SF VACANCY $22.65/SF 12.9% 12.2% QUARTERLY DELIVERIES 246,400 SF 0 SF UNDER CONSTRUCTION 80,977 SF 1,030,612SF Houston s medical office market is expected to benefit from both short- and long-term regional trends. Disciplined development, with only 152,000 SF of new medical space added during 2011, will relieve the pressure in filling the existing vacant lease space. It is not surprising that much of the new development activity is occurring in outlying suburban areas, particularly in West Houston, Fort Bend County and The Woodlands, where strong population growth trends are projected over the next twenty-five years. Overall, Houston s medical office market and economy remain among the strongest in the U.S. Houston gained about 77,000 new jobs in 2011, about a 3% year-overyear gain. According to the Texas Workforce Commission, Health Care & Social Assistance employment in Houston s MSA increased 3.7% in 2011 and the sectors is expected to see continued growth. As Houston s population continues to grow it will fuel further job growth. The Greater Houston Partnership predicts an increase of 10,200 jobs during 2012 in the Healthcare employment sector, helping to keep the medical office market healthy. UNEMPLOYMENT & JOB GROWTH (Seasonally Adjusted) UNEMPLOYMENT 11/10 11/11 HOUSTON 8.7% 7.8% TEXAS 8.3% 8.1% U.S. 9.8% 8.6% 500, , , , ,000 ABSORPTION, NEW SUPPLY & VACANCY RATES 17% 15% 13% 11% JOB GROWTH ANNUAL CHANGE 11/11 HOUSTON 3.4% 20.2k TEXAS 2.2% 46.4k U.S. 1.0% 120.0k 0-100, ,000 Absorption New Supply Vacancy 9% 7% 5% Accelerating success 1

2 Class A 5,567, % 20% 18% 16% 14% 12% 10% 8% EXISTING INVENTORY BY CLASS Class C 5,493, % 350, , , , , ,000 50,000-50, ,000 Class A Class B Class C NET ABSORPTION BY CLASS 0 Class A Class B Class C CLASS A & B VACANCY VS. RENTS 1Q-10 2Q-10 3Q-10 4Q-10 1Q-11 2Q-11 3Q-11 4Q-11 Class A Vacancy Class A Rents Class B 14,239, % Class B Vacancy Class B Rents Vacancy & Availability Houston s medical office occupancy improved during the 4Q 2011, with the citywide average vacancy rate dropping to 12.2%, a decrease of 60 basis points (bps) from 12.8% in 3Q By property class, Class B vacancy rates posted the largest decrease of 100 bps to 12.3% in 4Q 2011, compared to 13.3% in 3Q Class C vacancy rates decreased 90 bps to 10.6% from 11.5% and Class A vacancy rates increased 60 bps to 13.3% from 12.7%. Sublease space has not had a significant impact on current vacancy rates, remaining below 1.0% of total vacant space over the past five consecutive years. Of the 3.1M SF of vacant space on the market at the end of 4Q 2011, only 8,426 SF was sublease space. Disciplined medical office development activity has helped prevent major upheavals in current occupancy levels. There were only seven (7) new buildings (152,108 SF) added to the market during The largest project completed within the past twelve months was the Texas Children s Hospital West Campus located in the Katy Freeway West submarket followed by St. Luke s Vintage Park in the FM 1960/Hwy 249 submarket. Presently, only four medical office buildings are under construction including: University of Texas MD Anderson Cancer Center Administration Building located at 7007 Bertner Ave. in the Texas Medical (895,600 SF owner occupied); Medical Arts Center III located at St Luke's Way in The Woodlands (95,000 SF and 22% pre-leased); 3117 College Park Dr. in The Woodlands (30,000 SF and 0% pre-leased); and Modern Spine Pavilion at Southwest Freeway in Sugar Land (10,000 SF and 50% per-leased). Absorption & Demand Houston medical office buildings recorded 152,644 SF of positive net absorption in 4Q 2011, which brings the year-end total to 311,556 SF. By property class, Class B properties posted the largest amount of positive net absorption in 4Q 2011, posting 140,452 SF. The majority of medical tenant moveins during 4Q 2011 were in lease spaces under 5,000 SF. Some of those tenants include: US Imaging; Houston Nose; Sinus and Allergy; St. Luke s; West Oaks Hospital; Advanced Orthopedics. & Sports Medicine. Rental Rates Quoted full-service rental rates for all medical office property classes averaged $22.65/SF in 4Q 2011, an increase of 1.3% from the $22.37/SF in 3Q Medical office building landlords continued to offer lease concessions including free rent and generous tenant improvement packages to attract and retain credit worthy tenants. By property class, the average Class A rental rate of $26.90 per SF increased from $26.71 per SF, and the average Class B rate of $22.43 per SF increased from $22.24 per SF in 3Q The average Class C rental rate at $16.61 per SF decreased from $16.69 per SF in the previous quarter. COLLIERS INTERNATIONAL P. 2

3 Houston Physicians Hospital 333 N. Texas Avenue NASA/Clear Lake Submarket RBA: 91,082 SF Built: 2005 Buyer: Webster Surgical Specialty Hospital Seller: Alliance Development Sale Date: November 2011 Red Oak Office Building Red Oak Dr FM 1960/I-45 North Submarket RBA: 14,000SF Built: 1999 Buyer: RO Medical Realty Partners, LP Seller: LV Texas Properties Sale Date: October 2011 Sales Activity Transaction activity increased during the second half of Many of the transactions were multi-property sales; however, there were several significant single property transactions that occurred. The 120,596 SF Sugar Land Medical Plaza in the E Fort Bend/Sugar Land submarket was purchased by St. Luke s Episcopal Health System Corp in December 2011 for an undisclosed amount. The 91,082 SF Houston Physicians Hospital in the NASA/Clear Lake submarket was purchased by Webster Surgical Specialty Hospital for approximately $30M or $329 per SF. The property was built in 2005 and was 88.0% leased at the time of sale. The 14,000 SF Red Oak Office Building, located at Red Oak Dr. in the FM 1960/I-45 North submarket was purchased by RO Medical Realty Partners, LP for an undisclosed price. The asking price was $3.7M or $263 per SF. American Realty Capital Healthcare Trust, Inc. purchased a 3-property portfolio of medical office buildings containing a total of 130,963 SF for a reported $60.2M. The properties include: Tomball Parkway in Tomball, TX; Stonehue in San Antonio, TX; 7930 Northhaven Rd in Dallas, TX. Leasing Activity Houston s medical office leasing activity slowed between quarters with 110,965 SF posted in 4Q 2011, compared to 178,213 SF in 3Q By property class, Class B product led the market with 85,639 SF leased, followed by Class A at 14,626 SF, then Class C at 10,700 SF. Most of the new leases that were signed in 4Q 2011 were in the 1,000-5,000 SF range and some of those include: Texas HCS in the FM 1960/Champions submarket; Bayshore Pediatrics in the NASA/Clear Lake submarket; US Imaging in the Northwest submarket; Texas Medical and Geriatric Center in the Midtown submarket. Sugar Land Medical Plaza 1327 Lake Pointe Pky E Fort Bend/Sugar Land Submarket RBA: 120,596SF Built: 2008 Buyer: St. Luke s Episcopal Health System Corp Seller: Medistar Corp Sale Date: December 2011 Source: Costar Group COLLIERS INTERNATIONAL P. 3

4 TEXAS MEDICAL CENTER The Texas Medical Center (TMC) the world s largest medical center represents one of Houston s major economic drivers and core industries with an estimated regional annual economic impact of $14 billion. TMC is also one of Houston s 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 world s largest medical complex with 49 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 patient and preventive care. Member institutions include 13 hospitals and two specialized patient facilities, as well as 19 renowned academic and research institutions virtually covering all healthrelated 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 6 million patients visited in 2010, including about 18,000 international patient visits. The University of Texas M.D. Anderson Cancer Center ranked #1 by U.S. News in Best Hospitals In addition to the medical facilities and institutions of higher learning, TMC is also home to more than 100 professional office buildings. Overall, the complex covers over 18 miles of public and private streets and roadways, with 35 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 110-acre University of Texas Research Park, a joint effort between the University of Texas Health Science Center, M.D. Anderson and 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. TMC Patient Care Institutions The University of Texas M.D. Anderson Cancer Center Texas Children s Hospital Memorial Hermann Hospital System The Methodist Hospital St. Luke s Episcopal Hospital Lyndon B. Johnson General Hospital Quentin Mease Community Hospital Ben Taub General Hospital The Institute for Rehabilitation and Research The Hospice at the Texas Medical Center Texas Heart Institute Shriners Hospitals for Children Houston Veterans Affairs Medical Center in Houston TMC Academic and Research Institutions Texas Children s Hospital Neurological Research Institute Baylor College of Medicine The University of Texas Health Science Center at Houston 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 Woman s University Institute of Health Sciences Texas Southern University College of Pharmacy and Health Sciences Harris County Psychiatric Center Houston Academy of Medicine COLLIERS INTERNATIONAL P. 4

5 Houston Area Hospital Locations COLLIERS INTERNATIONAL P. 5

6 Colliers International Statistics Revenues: $1.5 Billion Countries: 61 Offices: 512 Professionals & Staff: 12,509 Brokers: 4,387 Square Feet Managed: 979 Million* Lease/Sale Transactions: 73,972 Total Transaction Value: $59.6 Billion (Based on 2010 results.) *The combination of Colliers International and FirstService results in 2.2 Billion under management (second largest in the world). COLLIERS INTERNATIONAL 1300 Post Oak Blvd, 2nd Floor Houston, Texas Main: Fax: Accelerating success. COLLIERS INTERNATIONAL P. 8