'Everyone Needs A Doctor,' But DFW’s Medical Office Boom Can't Match Population Growth

Dallas-Fort Worth is rushing to avoid a health crisis as its population continues to soar and construction challenges slow the pace of new and necessary medical office buildings.

The Metroplex's 2024 population of 8.1 million is expected to grow 8% by 2028 even as JLL projects outpatient volume will increase by nearly three times that percentage.

And despite billions of dollars of hospital construction projects in various stages of development, medical and retail professionals worry the region is stuck behind the population eight ball as they sprint to keep up amid a combination of higher-priced financing, rising construction costs and available stock that is unsuitable for modern needs.

“There's a foot race by the systems to position themselves in order to get people into their managed care networks and service that population,” JLL Managing Director Ethan Garner said.

The reason? Dallas County is expected to continue its 8% population growth through 2030, but its collar counties will grow even faster. Tarrant County will grow 12%, Collin County 26% and Denton County 28%, according to projections released by the Texas Demographic Center last year. 

By 2060, DFW’s population will be more than 12 million residents, with Dallas County over 3 million and the other three each above 2 million residents.

“Dallas is one of, if not the, fastest growing of the big cities, and everyone that moves here needs to have a doctor,” Big Sky Medical Director Chris Morgan said, adding that the investment firm focused on healthcare assets is in the process of buying as many medical office buildings as it can.

Dallas is expected to be the nation's third-strongest market for medical office absorption this year, according to CBRE, behind Boston and Houston, indicating strong demand in the sector. 

And after rising in three of the last four years, DFW's medical office construction pipeline is the strongest it has been this decade, finishing 2024 with more than 827K SF on the way, according to JLL data.

But even that is unlikely to be enough to meet the region's growth. 

There were already more than 3,300 practicing physician groups in DFW in Q4, all jockeying for existing medical office space, according to JLL.

With outpatient volume expected to grow more than 22% over the next three years, a lot more will be needed — all while it is unusually difficult to build quickly and barriers to construction are driving up the rents developers need to charge.

“Over the last few years, construction debt has gone up probably 2% to 3% at least,” Morgan said. “So what was a 3% construction loan is now more like 6% or 7%.”

Rises in construction debt can prevent a deal from penciling, and that comes in addition to the rising costs of land and construction materials. Tariffs on goods imported from Mexico, Canada and China also have the looming potential to affect construction costs and slow projects for developers.

“It's been challenging to deliver space for providers that don't have really strong financial backing in order to justify the expense,” Garner said. 

For those projects getting done, triple-net asking rents increased 1.4% year-over-year in 2024 to a record average of $24.86 per SF nationally, according to CBRE, which predicts annual increases of between 1.4% and 1.8% over the next two years as vacancy falls below 9.5%.

In DFW, last year’s 1.6M SF of medical leasing was on par with its five-year average, and vacancy rates fell to just under 16% in Q4 after several quarters of rising rates.

But much of that vacancy is in older products and among shared space with traditional office users and retailers.

“There's a continued push into retail-type locations,” Garner said. “From the primary care and family practice standpoint, [those] provide a quality, easy patient experience.”

Traditional office space is less appealing despite a vacancy rate of over 27% for Q4. Garner said conditions are seldom right for a conversion to healthcare uses.

Those conversions are infrequent because of limiting factors in typical building design. Elevators are rarely large enough to accommodate moving gurneys, and the buildings don’t usually have the capacity for the power redundancy needed.

Parking is also a limiting factor, as many medical uses in DFW are required to have a higher parking ratio than most office buildings can accommodate, Garner said.  

“Office landlords ask us about [medical conversions] all the time,” Garner said. “The ones that actually wind up executing on it is maybe three to five a year.”

While much of the region's demand is for Class-A medical office space, retail space in strip centers and Class-B space is changing hands, Worldwide Commercial President Jerad Rector said.

Worldwide Commercial announced the sale of a more than 57K SF value-add medical office building last month in Plano. In addition to brokering the sale, Rector was part of a group that bought the building six years ago and oversaw renovations to modernize it. 

Rents for new medical office space can range from the mid-$30s per SF to the upper $40s per SF, depending on location and build-out, Rector said. 

“There's still good value out there,” he said. “This building is being leased at $20 triple net, so there's still a pretty big spread on where the buyer can take this property and not compete with brand-new product.”

Yet thanks to higher rents and scarcer appropriate product, an increasing number of doctors are looking to own their own space, which is why office condo sales are rising in the region. Garner said that is a trend to watch over the next 24 months.

“You've got a lot more of the medical condos being built nowadays where a medical group or a doctor can go buy a 2,500 SF condo and own it,” Rector said. “There's a lot more different opportunities out there for the medical community.”

For now, the population aged 30 and younger easily outnumbers Texans over 40. But that will be a very different case in a few decades when the bulk of the state's population will be those aged 40 to 65 and needing a lot more medical care.

Medical practitioners are preparing now and hoping lending purse strings loosen and construction impediments fade away.

The emerging suburbs are the destination for much of the population growth, and the latest medical condo construction is happening in cities that have already seen their biggest booms, like Frisco, Plano, McKinney and Allen, Rector said. 

More than half of the medical office projects in the pipeline are in the West Collin County submarket, which includes the booming cities of Prosper and Celina. And all four of the major health systems in DFW are already operating in Collin County.

“It's all about ease of access,” Garner said. “Several systems have taken down land positions in Prosper and have built new community hospitals with outpatient medical buildings attached to them.”

Medical City Healthcare is slated to begin work on a $142M expansion to its McKinney hospital this year. 

“McKinney is one of the fastest growing cities in the nation and Medical City McKinney is committed to helping meet our region’s need for high-quality healthcare services,” Medical City McKinney CEO Mark Deno said in a statement.