Houston's Healthcare Real Estate Booms Despite Oil's Bust
While petro-dependent markets show signs of sogginess, there is at least one sector that remains robust. Healthcare real estate seems nearly impervious to the downturn, and the huge pipeline of healthcare development is proof.
Transwestern national director of healthcare Eric Johnson tells us healthcare real estate outperformed all other real estate sectors during the 2008-2011 recession. That historical resilience is evident now, a year into weakening oil prices.
We have $4.5B in healthcare construction underway or planned in 2016—a sign of vigorous growth, Eric says. He believes 2016 will be another strong year in Houston's medical real estate sector, with hospitals and large multi-specialty physician groups continuing to expand market coverage to increase leverage with their reimbursement contracts. He also predicts rents and occupancy rates will continue to rise and that we'll see several new MOBs announced next year to meet increasing demand in several growing submarkets, specifically Northwest, Northeast and West Houston.
His optimism isn’t just a one-off. Every healthcare real estate pro we spoke to was bullish about the state of the economy. While the Energy Corridor and energy-related office towers are feeling the burn, healthcare is surging.
Colliers SVP Coy Davidson focuses on medical real estate and says it's not being affected by low oil and gas prices. He calls healthcare a nearly bulletproof industry due to population growth, an aging population that needs medical care, and the Affordable Care Act. The original wait-and-see attitude around the ACA has burned off, Coy says, and the purse strings have been cut loose, revealing a lot of pent-up demand for new facilities. That has resulted in a flurry of new construction activity, particularly in the high-growth suburban areas.
In May, CHI St. Luke’s Health announced it was building a new $110M outpatient hospital near ExxonMobil’s new campus in The Woodlands. Next was Houston Methodist Hospital, with its $328M 193-bed hospital, also in The Woodlands. That facility will be complete in 2017. Oak Bend, Fort Bend’s oldest hospital, is growing its neonatal intensive care unit. Houston Methodist expanded to Clear Lake with its Christus-St. John Hospital in Nassau Bay and is building the Christus-St. Catherine’s campus in Katy.
Coy says the wild growth of the healthcare industry possibly has to do with the way doctors are delivering care these days. The demand is being driven by hospitals instead of private practices. As they continue to grow, they’ll demand more medical space.
“When you’re sick or a family member needs to see a doctor, you aren’t very concerned about the price of a barrel of oil at that moment,” says i3 Interests senior development associate John Joubert. “You just want the right physician." John, whose firm focuses on healthcare real estate, says many physician practices are bulking up in the suburbs with multiple locations or are relocating out of dense medical centers to gain greater access to their patients.
i3 Interests is looking at several medical acquisition opportunities around the state—both on- and off-market. Some are redevelopment opportunities, and some are in markets where demand provides for additional development in addition to the buildings they're looking to purchase, John tells us. The firm’s most recent acquisition was a portfolio of three MOBs with New York investors Atlas Real Estate Partners. The buildings at 800 Peakwood, 810 Peakwood and 714 FM 1960 were purchased at below-market occupancy and rental rates, and i3 Interests will increase their value through a phased renovation program.
“When I talk to my friends in other markets—office leasing and multifamily—I feel like we have more than we can say grace over,” says John.
Healthcare should have another five years to run locally, says Colliers Fort Bend VP Barkley Peschel. He recently attended a seminar panel discussion with top execs and CEOs from all the major Fort Bend County hospitals. They unanimously agreed that healthcare would continue to grow in Houston over the next five years, but conceded that with the ACA in play, we might have a tiny bit of expand-and-contract while we realign. Barkley expects commercial real estate in Fort Bend and other high-growth submarkets to be affected by the oil and gas slowdown, but says Houston overall will continue to grow. The expansion of the healthcare industry will be a contributing factor.
The suburbs are having a golden age of healthcare real estate construction, but the Houston Medical Center is also seeing huge expansion.
Baylor College of Medicine and CHI St. Luke’s are building a second patient tower at their McNair campus. Texas Children’s Hospital recently confirmed plans to spend $506M to expand its flagship Houston facility. The hospital will build a new 19-floor project that includes a new heart center and expanded critical care, as well as diagnostic and therapeutic services. Construction is targeted for completion in 2018.