COLLIERS INTERNATIONAL HOUSTON Market Research MEDICAL OFFICE THIRD QUARTER 2007 Houston s Medical Office Market Expands MARKET INDICATORS Q3-06 Q3-07 Net Absorption 165,225 SF -20,848 SF Overall Rental Rate $19.97 PSF $21.57 PSF Class A Rental Rate $23.71 PSF $26.83 PSF Overall Vacancy 12.1% 14.9% Class A Vacancy 16.1% 19.1% Construction 948,500 SF 409,731 SF Developers continue to bank on Houston s medical office market in response to the area s healthy population growth and residential expansions. The Houston metropolitan statistical area (MSA) is one of the fastest growing in the U.S., with 26.4% population growth in the decade between 1990 and 2000 compared to 13.4% for the U.S. and the 2007 population estimated to exceed 5.5 million. Along with strong population growth, residential expansions have continued unabated in the Houston area. The push to outlying areas of the city has been of particular significance to health care providers as the number of residents requiring medical facilities has increased dramatically in the past decade. Developers have been quick to respond to this need by introducing medical office buildings (MOBs), also known as professional office buildings (POBs), in all major suburban areas of Houston. Partly due to the Texas Medical Center s (TMC) saturation of the west Inner Loop market, but mostly following the strong population expansion in West Houston, the majority of new MOBs built since 1990 are concentrated in outlying northwest, west, and southwest submarkets. Much of this new development has been strategically placed within close proximity to existing major medical facilities, an amenity benefiting both providers and clients. The TMC s overall impact on the metro s medical industry growth is significant. One of Houston s core industries representing an annual economic impact of $9.9 billion, the TMC is itself in expansion mode with over $8.2 billion in capital investments from 2002-2004 and $3.5 billion in research funding during 2000-2004. Overall, TMC and the adjacent South Main submarket account for 42% of Houston s entire medical office inventory. (Please see page 6 of this report for more detailed information on the TMC.) JOB GROWTH & UNEMPLOYMENT ABSORPTION, NEW SUPPLY & VACANCY 1,100,000 20.0% Sept-06 Sept-07 900,000 18.0% 16.0% HOUSTON 2.6% Job Growth 64,500 jobs unemployment 4.7% 4.3% TEXAS 2.0% Job Growth unemployment 4.7% 4.4% U.S. 1.2% Job Growth unemployment 4.4% 4.5% 700,000 500,000 300,000 100,000-100,000 1999 2000 2001 2002 2003 2004 2005 2006 YTD-07 Absorption New Supply Vacancy 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% www.collierstexas.com COLLIERS INTERNATIONAL 1
MEDICAL/PROFESSIONAL OFFICE BUILDINGS BY PROPERTY CLASS Class A 4.1 msf 80.9% occ. $26.83 psf 16% 14% 12% 10% 8% 6% 4% 2% 0% Class C 5.5 msf 88.6% occ. $16.86 psf Class B 9.1 msf 84.8% occ. $20.79 psf MEDICAL OFFICE RENTS & VACANCY 3Q-99 3Q-00 3Q-01 3Q-02 3Q-03 3Q-04 3Q-05 3Q-06 3Q-07 Vacancy Rental Rates Houston Market Third Quarter 2007 Gross Rental Rates/sf $21.57 Vacancy Rate 14.9% 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 MEDICAL OFFICE LEASING ACTIVITY 2000 2001 2002 2003 2004 2005 2006 YTD-07 Houston Medical Office Leasing Year-to-date 2007 391,658 sq. ft. Jan Dec 2006 662,292 sq. ft. $24 $22 $20 $18 $16 $14 $12 $10 Vacancy & Availability Citywide, a significant increase in new medical office development has pushed vacancy up in the third quarter to 14.9% from 12.1% one year ago (see chart on previous page depicting Houston s medical office construction and vacancy trends from 1999 to 2007). The ongoing surge in new development has been in direct response to the exceptionally low levels of available medical office space on the market that kept vacancy in single-digits until just two years ago. While the recent increase in supply appears to be outpacing demand for medical office space in Houston, consideration should be given to the natural market lag that typically follows construction deliveries and the actual absorption of newly added space. With other key indicators suggesting solid demand for medical office space in Houston, supply and demand levels in the market are expected to come back in line with the absorption of the new space over the next 18 to 24 months. Key submarkets continued to outperform the citywide medical office vacancy average for all property classes combined in the third quarter, including Woodlands (7.5%), Katy Freeway (8.4%), Richmond/Fountainview (9.3%), Greenway (9.3%), and South Main/Medical Center (10.4%). Leasing of medical office space continued at a healthy pace with 105,214 sq. ft. in the third quarter bringing the year-to-date total to 398,658 sq. ft. leased citywide. By comparison, 2006 recorded a total of 662,292 sq. ft. of medical office space leased in Houston. Overall, the market has experienced an increase in leasing activity that began in 2004 and continues to the present. (See chart at left for historical leasing activity in Houston s medical office sector.) Rental Rates Medical office buildings in Houston posted rental rate increases in the third quarter as landlords continued to benefit from the limited amount of quality space in select submarkets. Citywide, the weighted average quoted rental rate reached $21.57 in the third quarter, a significant 8.0% annualized increase from the $19.97 per sq. ft. at this time last year. By property class, class A medical office space led the market in rental rate gains with the quoted $26.83 per sq. ft. marking a 13.2% increase from $23.71 twelve months earlier. By comparison, class B medical office rental rates at $20.79 and class C at $16.86, posted solid gains of 5.1% and 5.8%, respectively. Rising vacancy levels typically signal falling rental rates, although this is not the case for Houston s medical office market (see Vacancy & Rental Rate graph at left). While the market s current rental rate increases can in part be attributed to landlord s higher operating expenses, another factor impacting rents is the greater demand for office space by medical personnel serving Houston s expanding population. Absorption & Demand Year-to-date positive net absorption of medical office space in Houston reached 231,192 sq. ft. through the third quarter, compared to 206,474 sq. ft. absorbed in the first three quarters of 2006. Stronger gains in occupied space are expected at year-end when increased activity typical of the fourth quarter is included (Q4 absorption exceeded 200,000 sq. ft. in both 2005 and 2006), Year-end 2007 net absorption is expected to near the 465,000 sq. ft. absorbed in the twelve months ending in December 2006. COLLIERS INTERNATIONAL 2
TOP PERFORMING MEDICAL OFFICE BUILDINGS One Fannin Professional Medical Bldg 7400 Fannin Houston Medical Plaza 6655 Travis RBA: 213,799 sf Built: 1990 Leased: 77.2% Available: 39,715 sf Rents: $36.91 psf RBA: 129,642 sf Built: 1983 Leased: 96.1% Available: 10,642 sf Rents: $31.00 psf Greenpark II Professional Medical Bldg 7505 S Main RBA: 80,098 sf Built: 1985 Leased: 95.9% Available: 11,287 sf Rents: $28.00 psf Sugar Land Medical Building II 15400 Southwest Freeway Sugar Land/E Fort Bend County RBA: 60,000 sf Built: 1999 Leased: 64.6% Available: 21,254 sf Rents: $28.00 psf Steeplechare Corner Professional Bldg 11301 Fallbrook Drive FM 1960/Highway 249r RBA: 57,600 sf Built: 1984 Leased: 100% Available: 2,219 sf Sublet Rents: $27.00 psf Oasis Medical Office Building 11929 W. Airport Boulevard Sugar Land/E Fort Bend County RBA: 206,000 sf Built: 2007 Leased: 59.6% Available: 83,320 sf Rents: $26.00 psf Memorial City Professional Bldg III 915 Gessner Road Katy Freeway Texas Medical Center Professional Bldg. 7501 Fannin RBA: 214,522 sf Built: 2004 Leased: 94.6% Available: 21,880 sf Rents: $26.00 psf RBA: 201,000 sf Built: 2004 Leased: 68.9% Available: 62,614 sf Rents: $26.00 psf Fannin Bank Professional Building 1020 Holcombe Boulevard RBA: 263,907 sf Built: 1962 Leased: 88.0% Available: 31,599 sf Rents: $27.50 psf Memorial Hermann Medical Plaza 6400 Fannin RBA: 511,000 sf Built: 2007 Leased: 52.1% Available: 245,000 sf Rents: $27.50 psf COLLIERS INTERNATIONAL 3
Houston Investment Sales Year-to-date 2007 Total volume $148.9 (in mil.) # of properties: 13 Total Sq. Ft.: 842,047 Price/Sq. Ft.: $177 Average Cap: 7.2% Texas Markets Price/SF Houston $177 Dallas $235 San Antonio $120 Austin $174 Source: Real Capital Analytics Sales Activity Medical office building sales in the Houston metro area year-to-date through the third quarter reached a total volume of $148.9 million with thirteen properties trading at an average capitalization rate of 7.2%. With year-end totals still pending, Houston has already exceeded the medical building sales activity of $143.6 million recorded in 2006. The University Medical Plaza $303 PSF Strong sales activity is predominating in Houston with medical office buildings representing all property classes in both infill and outlying locations changing ownership. Significant Houston medical office building sales closed in the past 18 months are listed in the table below and pictured at right. SELECT HOUSTON MEDICAL OFFICE BUILDING SALES 2006/2007 PROPERTY / ADDRESS SQ. FT. YOC/REN BUYER / SELLER PRICE $/SQ.FT. SUBMARKET Baylor College of Medicine Towers 154,905 Means-Knaus LLC $43.6 MIL 1709 Dryden Road 1954/2005 CMD Realty Investors $282 One Southwest Center MOB 153,158 NHP Houston MOB LLC $23.0 MIL Southwest Beltway 8 6671 Southwest Freeway 1984/2006 Quality Infusion Care, Inc. $150 Prior sale: Aug-05 Conroe Medical Arts & Surgical Plz 68,832 ING Clarion Partners $18.3 MIL Conroe River Pointe Drive 1980/2003 Promed Realty/Conroe IMP Ltd. $266 Triumph Healthcare Northwest 88,213 Triple Net Properties $17.8 MIL FM 1960 205 Hollow Tree Lane 1986 Hollow Tree LLP $201 Sugar Land Medical Pavilion B 81,200 Triple Net Properties $15.0 MIL Sugar Land/E. Fort Bend 14815 Southwest Freeway 1998 Park Medical Pavilion Ltd. $185 Sadler Clinic MOB 41,000 LSAC Woodlands LP $10.0 MIL Woodlands 9201 Pinecroft Drive 2004 Real King Interests $244 Cypress Station MOB 54,390 Realty Capital Partners LLC $9.4 MIL FM 1960 1140 Cypress Station Drive 1981 Northwest Diagnostic Imaging $172 prior sale: Jan-04, $5.5 MIL Fairmont Medical Building 36,170 Schmid Moulton Parkway LP $7.2 MIL Gulf Frwy/Pasadena 6243 Fairmont Parkway 1995 Jana Holdings, Ltd. $198 The University Medical Plaza 22,772 Investments Property Exchange Services $6.9 MIL Sugar Land/E Fort Bend 20403 University Boulevard 2004 Physician Property Investment II $303 Kuykendahl Medical Office 22,000 Indian Mils Senior Community Center $5.1 MIL Woodlands 21301 Kuykendahl Road 2006 29200 K Development LP $233 12345 Katy Freeway MOB 13,466 RSL Concentra LLC $4.0 MIL Energy Corridor/Katy Frwy 12345 Katy Freeway 1997 West Houston Real Estate LC $297 Bellaire Medical Professional Bldg. 64,562 James McLaughlin, Jill Harrell $3.7 MIL Bellaire 6550 Mapleridge Street 1979/2003 Bellaire Professional Building, LP $57 Copperfield Medical Center 14,348 Commercial Net Lease Realty $3.0 MIL FM 1960/Hwy 249 8925 Highway 6 North 1,995 Triple Net Properties $209 Conroe Professional Building 34,848 333 RCTX LLC $2.9 MIL Conroe 333 N. Rivershire Drive 1980 Conroe Atrium Ltd $82 San Jacinto Surgery Center MOB 12,000 SJMH06 Baytown TX LP $2.8 MIL Baytown 1025 Birdsong Drive 1998 Broadmoor at Chelsea Company $233 Colony Medical Center 15,000 GTEC Medical Plaza Development $2.3 MIL Sugar Land/E Fort Bend 4415 Highway 6 1994 AMReit $153 Humble Diagnostic Center 25,283 Schmid-Moulton Parkway LP $2.2 MIL Kingwood/Humble 18838-18842 Memorial 1982 The Carpenter Investment Trust $88 MacGregor Medical Association 23,800 MedClub Group LLC $1.6 MIL Gulf Frwy/Pasadena 4000-4002 Burke Road 1984 Vickery Medical Properties LLC $67 12790 S Kirkwood MOB 12,310 Odyssey Healthcare Operating A, LP $1.2 MIL Sugar Land/E Fort Bend 12790 S Kirkwood 1985 Upendra Sahu $95 COLLIERS INTERNATIONAL 4
Memorial Hermann Medical Plaza 511,381 sq. ft. Oasis Medical Office 206,000 sq. ft. 251 Medical Center 48,000 sq. ft. Christus St. Catherine Medical Plz III 45,803 sq. ft. Sugar Land Medical Plaza 125,000 sq. ft. Sugar Land Submarket Southwest Beltway 8 Submarket NASA/Clear Lake Submarket Sugar Land Submarket S. Main/Medical Center Submarket DEVELOPMENT PIPELINE MEDICAL OFFICE NEW DELIVERIES Houston s medical office building market includes 18.65 million sq. ft. of leasable space in 320 properties. Of this total, 36% or 6.7 million square feet has been added to the market since 1989. Notably, the most active development phase has occurred in the past eight years, during which time positive absorption levels have increased dramatically. Outside of the South Main/Medical Center submarket, significant growth has occurred in several suburban sectors including the Memorial City area (West), FM 1960 (Northwest), Woodlands (North), and Kingwood (Northeast) submarkets. Year-to-date through the end of the third quarter 2007, Houston added seven new medical office buildings with a combined 981,574 sq. ft. Among the most significant new projects, Mischer Healthcare Services introduced the 511,381- sq. ft. Memorial Hermann Medical Plaza (6400 Fannin) in the first quarter in the S. Main/Medical Center submarket. Memorial Hermann Medical Services is occupying approximately 50% of the building, with the remainder available for lease. In the Sugar Land/E. Fort Bend County submarket, San Francisco-based The Chaparral Group completed the 206,000-sq. ft. Oasis Medical Office Building (11929 W. Airport Boulevard) in the first quarter. The multi-tenant property is currently 60% leased. Other 2007 deliveries included the 86,300-sq. ft. Bally Park MOB (Barker Cypress Road, Katy Freeway submarket); the 48,000-sq. ft. 251 Medical Center Boulevard MOB (NASA/Clear Lake submarket); the 45,803-sq. ft. Christus St. Catherine Medical Plaza III (19770 Kingsland Boulevard, Southwest Beltway 8 submarket); the 34,090-sq. ft. Louetta Professional Building (Cutten Road at Louetta, FM 1960 submarket); the 25,000-sq. ft. 5622 E. Sam Houston Parkway North MOB (I-10 East submarket); and the 25,000-sq. ft. Pinecroft Professional Center II (9301 Pinecroft Drive, Woodlands submarket). UNDER CONSTRUCTION MEDICAL OFFICE BUILDINGS At the end of the third quarter, Houston had seven medical office projects in outlying submarkets under construction with a combined total of 409,731 sq. ft. to be delivered by mid-year 2008. Among the largest of these projects, Medistar Corporation is developing the 125,000-sq. ft. Sugar Land Medical Plaza located at 1327 Lake Pointe Parkway scheduled for completion in March 2008 in the Sugar Land/E. Fort Bend County submarket. The Woodlands submarket will be adding two new medical office buildings at 9303 and 9305 Pinecroft Drive, with 60,000 sq. ft. and 80,500 sq. ft., respectively. Riverway Commercial Development is introducing a 64,731-sq. ft. medical office building at 1920 Country Place Parkway in the Pearland market. Houston also has two medical office buildings under construction currently being marketed for sale only, including a 20,000-sq. ft. medical office building on East Medical Center Boulevard in the NASA/Clear Lake submarket, and a 14,500-sq. ft. medical office at 7435 Highway 6 in Missouri City in Southwest Houston. COLLIERS INTERNATIONAL 5
TEXAS MEDICAL CENTER The Texas Medical Center (TMC) represents one of Houston s major economic drivers and core industries with an estimated economic annual impact to the greater Houston area of $9.9 billion. The internationally-renowned, 800-acre TMC is also the world s largest medical complex with 42 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. Patient care institutions include 13 hospitals and two specialized patient facilities, as well as eleven renowned academic and research institutions virtually covering all health-related careers in two medical schools; four nursing schools; as well as schools of dentistry, public health, and pharmacy. Over 22,000 students are enrolled at TMC academic institutions, with 70,500 participants attending educational or professional retraining at these facilities. TMC represents Houston s largest employer with 65,300 employees in 2004 (the most recent year for available data), not including the 10,000 professionals and support personnel who work in adjacent professional buildings. More than 5.2 million patients visited in 2004, of which 10,456 were international patients. In addition to the medical facilities and institutions of higher learning, TMC is also home to more than 100 professional office buildings, including 26 million square feet of physical plant space. Overall, the complex covers over 18 miles of public and private streets and roadways. TMC has continued to grow and expand throughout the 1970s, 1980s, 1990s and into the present. In the period between 2002 and 2004, $2.1 billion were spent on additions to existing facilities, with a total $8.2 billion in capital investment as of December 2004. Funding committed for research at TMC totaled $3.5 billion between 2000 and 2004. Texas Medical Center Institutions TMC Patient Care Institutions The University of Texas M.D. Anderson Cancer Center Texas Children s Hospital Memorial Hermann Hospital 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 Ctr in Houston TMC Academic and Research Institutions 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 6
Colliers International has 267 Offices Worldwide 57 Countries on 6 Continents USA 95 Canada 17 Latin America 17 Asia Pacific 85 EMEA 52 NORTH AMERICA AFRICA EUROPE AND MIDDLE EAST HAWAII SOUTH AMERICA $1.6 billion in revenue 672.9 million square feet under management 10,171 Professionals Colliers International office locations are indicated by yellow dots on the map. ASIA PACIFIC AUSTRALIA For more information, please contact Colliers International 1300 Post Oak Blvd, 2 nd Floor Houston, Texas 77056 Tel. 713.222-2111 Fax 713.830-2118 www.collierstexas.com For 50 years, Colliers International in Houston has provided real estate solutions to leading corporations, institutions and small businesses. Our services include owner and tenant representation in leasing, acquisition, sale and financing for office, investment, industrial, retail, medical, mixed-use and land. COLLIERS INTERNATIONAL 7