DFW Medical Office Rents Will Need To Rise Further To Fuel Growth
DFW’s medical office market, which mostly sailed through the coronavirus pandemic compared to office as a whole, saw solid leasing growth, lower vacancy rates and rising rents over the first six months of 2021. But a report released this week suggests taking advantage of that stability with additional development could take time.
Transwestern’s midyear medical office report for Dallas-Fort Worth points to a market that has shown rare resilience through the pandemic and is emerging in a strong position due to the rapid growth of outpatient services and increased demand from an influx of new residents, many of them employed in well-paying jobs.
Covid-19-related operational disruptions and stricter protocols delayed elective procedures at hospitals, the report says, likely hastening an ongoing trend toward more outpatient procedures. Economic conditions are also benefiting medical offices. Transwestern cited U.S. Bureau of Labor Statistics data showing white-collar employment in Dallas already surpasses pre-pandemic levels, and the city is likely to set record employment records this year, according to a June Dallas Morning News analysis of Dallas Federal Reserve projections. That analysis estimates North Texas will add more than 250,000 jobs by year's end.
Population trends also favor the market. Projections suggest DFW will have a population of roughly 9 million by 2030, according to an analysis by Cushman & Wakefield published in Dallas Culture Map, up from 7.8 million today.
All that adds up to what Transwestern calls “tailwinds” for the sector, which has helped it sustain positive net absorption throughout the pandemic and bring the vacancy rate to 12.9% for the first half of 2020, below the long-term average of 13% and down 1.3% over the same period last year.
On another positive note, rents are on an upswing at an average $27.91 per SF, about a 2% to 3% rise over the first six months of the year. Those numbers might have to climb a little higher, though, to fuel new development. Transwestern characterized the 453K SF of new medical space delivered so far this year as “modest,” pointing out the high construction costs that have plagued projects across the board are holding new projects back.
“If strong demand continues, rent growth may accelerate and help spur new development,” the report notes.
Transwestern Research Manager Andrew Matheny told Bisnow every project will have a different tipping point in terms of when it makes financial sense to launch new development.
“There are well-positioned medical offices that have raised rents by 5%-8% from last year. More deal activity in these properties along with tightening vacancy rates will make the case that the market can support new development,” Matheny said. “Given the overall healthcare industry trends and DFW’s regional growth story, this is not a question of if, but when.”