Rental Rates in Houston Stable for Medical Office Buildings

By Henry Hagendorf, CCIM, LEED AP and Beth Young, CCIM, LEED AP, Hagendorf-Young Commercial Property Services

Nationally the investment market for healthcare properties, especially medical office buildings (MOB), picked up momentum about seven years ago and has strongly marched forward since. Other commercial property types, traditional office, retail and industrial, were affected more during the recent recession and investor interest stalled or dipped while trying to analyze or understand the economy. This holds true for Houston as well but due to the above average performance of the local economy commercial properties were impacted less than those in other national sectors. Locally, prognosticators and economists see no imminent danger on the horizon that will impact this positive momentum. Utilizing information from CoStar Group, the nation’s premier provider of commercial real estate information and analytic services, a study of historic rental rates for medical office buildings easily indicates why MOB properties are popular for landlords and investors. In the Houston area CoStar tracts 21 submarkets totaling approximately 25 Million square feet of medical office space in all classes-A, B and C. CoStar research indicates that the average rental rate for Class “A” MOB space in Houston in June of 2007 was approximately $23.75 per square foot. Fast forward to June 2012 and the average rental rate increased to approximately $30.75. This reflects an increase of $7.00 per square foot or a very healthy 29% for these premier properties. For Class “B” MOB space, while the increase is less at $2.75 per square foot and 14% for the same time period, this is still impressive considering the timeframe was during a recession in the economy. Rental rates in this report are stated as “Gross Rental Rates” which include the standard operating expenses for the property.

Chart: Medical Office Buildings In Greater Houston – Dramatic Increase In Class “A” Rental Rates (Source CoStar Group)

Rather than reporting on all the 21 submarkets individually, 6 were chosen to look at their historic performance. As indicated on the chart below, both Class “A” and “B” were combined thus the overall rental rates will appear lower and the increases less dramatic.

The Texas Medical Center: Class A and B combined rates increased from an average of $25.75 to $28.00 per square foot. Class A rental rates range from $26.00 - $35.50 per square foot. This is the largest submarket for MOB space in the Houston area with over 9 Million square feet. While there is an increase in rental rates the increase may not be as dramatic as expected based on the dynamics of the market. One of the reasons for this is that some of the MOB space is owned by non-profit healthcare institutions and while they are demanding fair market rental rates their overall objective is not to maximize rental rates.

The Woodlands: While currently this submarket if very hot, historically the rental rate averages have not increased dramatically for Class A and B MOB properties. Currently when combined they average $24.00. The Class A sector of this submarket is very strong with rental rates ranging from $23.00 to $33.00 and often boasting occupancies from 90-100%.

Nasa/Clear Lake: This submarket seems to shadow the economy more than others. In June 2007 the average Class A and B combined rental rate was $23.25 dipping to $20.75 in June 2008 then recovering and improving to $24.50 at the end of 2011.

Sugarland: Similar to the Woodlands this submarket showed little change in combined Class A and B rates and currently average approximately $24.00. Currently Class A rates range from $22.00 to $32.00.

Katy Freeway: The Katy Freeway indicates solid historical performance with rental rates increasing from an average of $21.00 to $25.50 or 21% at the end of March 2012.

FM 1960: Of the submarkets analyzed this one has the lowest overall rental rates and indicates a slight decline in combined Class A and B rental rates from an average of approximately $20.00 to $19.00.