Year End 2013 Houston Medical Office Report

YEAR-END 2013 | MEDICAL OFFICE

Accelerating success.

HOUSTON MEDICAL OFFICE MARKET INDICATORS

2012 2013

CITYWIDE NET ABSORPTION (SF) 1.3M 662K

CITYWIDE SF DELIVERED 1.7M 235K

CITYWIDE AVERAGE VACANCY Q4 13.3% 11.7%

CLASS A AVERAGE VACANCY Q4 13.6% 7.1%

CITYWIDE AVERAGE RENTAL RATE Q4 $23.09 $23.19

CLASS A AVERAGE RENTAL RATE Q4 $29.33 $28.17

COLLIERS HEALTHCARE SERVICES GROUP - HOUSTON, TEXAS

HEALTHCARE MARKET COMMENTARY

Houston medical office buildings recorded 662,000 SF of positive net absorption in 2013, the majority of which, 444,300 SF, occurred in the first half of the year. By property class, Class A posted the largest amount of positive net absorption in the second half of the year, followed by Class B and then Class C posting 51,184 SF and 30,106 SF, respectively. The citywide average vacancy rate decreased 20 basis points and the average quoted rental rate increased 0.9% to $23.19 per SF from $22.99 per SF in Q2 2013.

Houston’s medical office market is expected to benefit from both short- and long-term regional trends. Disciplined development, with only 6 new buildings added to inventory in 12 months, will relieve the pressure in filling the existing vacant lease space.

Overall, Houston’s economy remains among the strongest in the U.S. The Houston metropolitan area added 86,200 jobs between November 2012 and November 2013, an annual increase of 3.1% over the prior year’s job growth. Local economists have forecasted 2014 job growth to remain steady, adding between 68,000 and 72,000 jobs. Further, Houston’s unemployment fell to 5.6% from 5.8% one year ago. Houston area home sales increased 19.4% between November 2012 and November 2013.

5%7%9%11%13%15%17%

(500,000)

0

500,000

1,000,000

1,500,000Absorpt ion New Supply Vacancy

ABSORPTION, NEW SUPPLY & VACANCY RATES

Houston

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UNEMPLOYMENT 11/12 11/13 HOUSTON 5.8% 5.6%

TEXAS 6.0% 5.8%

U.S. 7.4% 6.6%

JOB GROWTH ANNUAL CHANGE

# OF JOBS ADDED

HOUSTON 3.1% 86.2K

TEXAS 2.5% 275.7K

U.S. 1.7% 2.3M

JOB GROWTH & UNEMPLOYMENT (Not Seasonally Adjusted)

Houston’s Medical Office Market Absorbs 662,000 SF in 2013

HEALTHCARE MARKET COMMENTARY | YEAR-END 2013 | COLLIERS INTERNATIONAL HOUSTON

COLLIERS INTERNATIONAL | P.

Vacancy & Availability Houston’s medical office market occupancy increased during the second half of 2013 with the citywide average vacancy rate decreasing by 20 basis points to 11.7% from 11.9%.

By property class, Class A vacancy rates posted the largest decrease during the second half of 2013, dropping 120 basis points to 7.1% from 8.3% in Q2 2013. Class C vacancy rates decreased 40 bps to 10.4% from 10.8%, while Class B vacancy rates increased 40 basis points to 14.2% from 13.8%.

Sublease space has not had a significant impact on current vacancy rates, remaining below 0.2%. Of the 3.5M SF of vacant space on the market, only 25,300 SF was sublease space.

Disciplined medical office development activity has helped prevent major upheavals in current occupancy levels. There were only six (6) new buildings (235,000 SF) added to the market during 2013, most of which are low-rise professional office buildings located in the suburbs. Currently, there are six (6) medical office buildings under construction.

Empire Commercial Developers has begun construction in Telfair on a 3-story, 46,000-SF medical office building with a 3-story parking garage. The project is

slated for completion by July 2014.

Absorption & Demand Houston’s medical office market recorded 217,857 SF of positive net absorption in the second half of 2013, bringing the year-end positive net absorption to 662,176 SF.

By property class, Class A posted the largest amount of positive net absorption in the second half of 2013, with 136,567 SF, followed by Class B properties posting 51,184 SF of positive net absorption and then Class C posting 30,106 SF.

Rental Rates Quoted full-service rental rates for all medical office property classes averaged $23.19 per SF in Q4 2013, an increase of 0.9% from $22.99 per SF in Q2 2013. Medical office building landlords continued to offer lease concessions including free rent to credit worthy tenants, but have decreased the amount of tenant improvement packages.

By property class, on a bi-annual basis, the average Class A rental rate decreased from $28.42 per SF in Q2 2013 to $28.17 per SF, Class B increased to $23.16 per SF from $22.83 per SF, and the average Class C rate increased to $18.08 per SF from $17.81 per SF.

MEDICAL OFFICE CLASS A & B VACANCY VS. RENTS

$10

$15

$20

$25

$30

$35

4%

6%

8%

10%

12%

14%

16%

Q4-

10Q

1-11

Q2-

11Q

3-11

Q4-

11Q

1-12

Q2-

12Q

3-12

Q4-

12Q

1-13

Q2-

13Q

3-13

Q4-

13

Class A Vacancy Class B Vacancy

Class A Rents Class B Rents

Class A 7,340,192

27.5% Class B

14,239,726 54.9%

Class C 5,186,995

17.5% Class AClass BClass C

(100,000)

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Q4-

10Q

1-11

Q2-

11Q

3-11

Q4-

11Q

1-12

Q2-

12Q

3-12

Q4-

12Q

1-13

Q2-

13Q

3-13

Q4-

13

Class A Class B Class C

MEDICAL OFFICE NET ABSORPTION BY CLASS

MEDICAL OFFICE EXISTING INVENTORY BY CLASS

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Sales Activity Transaction activity slowed slightly between mid-year 2013 and year-end 2013, with 16 properties changing hands compared to 30. According to CoStar Comps, Houston medical building sales transactions in the second half of 2013 had a total sales volume of $36.3M.

Many of the transactions were multi-property portfolio sales, however, there were several single property transactions that occurred, which are listed in the column to the left.

Currently, there are 48 properties listed for sale and 1 pending transactions.

Leasing Activity Houston’s medical office leasing activity reached 391,400 SF in the second half of 2013. By property class, Class B product led the

market with 279,600 SF leased, followed by Class A at 74,100 SF, then Class C at 37,700 SF.

Although the majority of new leases signed in the second half of the year were in the 1,000 - 5,000 SF range, there were a few larger lease transactions.

DaVita HealthCare Partners, Inc. leased 15,180 SF in the Bayshore Medical Building located at 333 Bayshore Blvd. in Pasadena, TX.

UT Physicians leased 14,048 SF in the Plaza Medical Center located on Binz St in the South Main/Medical Center submarket.

Additional transactions under 5,000 SF include: Medwin Family Medicine Rehab’s lease of 4,340 SF at 1235 Lake Pointe Pwy. in the Fort Bend/Sugar Land submarket and Methodist Primary Care Group leased 3,737 SF at 4710 Bellaire Blvd. in the Bellaire submarket.

RBA: 58,023 SF Built: 1991 Buyer: Health Care Property, Inc. Seller: Kindred Healthcare, Inc. Sale Date: September 2013 Sale Price: $15.2M

RBA: 214,073 SF Built: 1982/1998 Buyer: Mental Health & Mental Retardation Authority Seller: MidFirst Bank Sale Date: December 2013 Sale Price: $9.5M

Clear Lake Rehabilitation Hospital NASA/Clear Lake Submarket

SALES TRANSACTIONS

Westwood Plaza II Southwest Beltway 8 Submarket

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RBA: 10,500 SF Built: 2006 Buyer: Areteaus Realty Trust, LP Seller: Jaffe Dialysis, LLC Sale Date: November 2013 List Price: $5.7M Cap Rate: 8.2%

8340 Coffee St South Submarket

Source: Costar Group; Real Capital Analytics



The Texas Medical Center (TMC) – the world’s largest medical center – represents one of Houston’s major economic drivers and core industries with an estimated regional annual economic impact of $15 billion. TMC is also one of Houston’s largest employers with 106,000 employees, including physicians, scientists, researchers and other advanced degree professionals in the life sciences. The internationally-renowned, 1,345-acre TMC is the world’s largest medical complex with 54 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. Over 70,000 students – including more than 20,000 international students – are affiliated with TMC, including high school, college and health profession graduate programs. More than 7.2 million patients visited in 2012, including approximately 16,000 international patient visits. In addition to the medical facilities and institutions of higher learning, TMC is also home to more than 290 professional buildings. Overall, the complex covers over 18 miles of public and private streets and roadways, with 45.8M SF of existing patient, education, and research space. TMC has continued to grow and expand over the past several decades with the majority of growth occurring in the past ten years. The Center is located in the 110-acre University of Texas Research Park, a joint effort between the University of Texas Health Science Center, M.D. Anderson and General Electric Healthcare. TMC spent $7.1 billion in building and infrastructure investments between 2008 and 2012, and spent over $3.4 billion on research and over $960 million on charity care in 2012.

TMC Patient Care Institutions DePelchin Children’s Center

The Menninger Clinic

The University of Texas M.D. Anderson Cancer Center

Texas Children’s Hospital

Memorial Hermann Hospital System

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 Center in Houston

TMC Academic and Research Institutions Sabin Vaccine Institute

The University of Houston – Victoria School of Nursing

Texas Children’s Hospital Neurological Research Institute

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

TEXAS MEDICAL CENTER

The University of Texas M.D. Anderson Cancer Center in the Texas Medical Center, ranked #1 in U.S. News & World Reports “Americas Best Hospitals 2013” for cancer care.

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HOUSTON AREA HOSPITAL LOCATIONS

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TEXAS MEDICAL CENTER MAP

Texas Medical Center

World’s Largest Medical Complex (1,300 Acres) 54 Member Institutions 7.2M Patients in 2012 106,000 Employees 5,000 Physicians 49,000 Life Science Students $960 million in Charity Care

Houston MSA Health Care

115 Hospitals 19,830 Hospital Beds 13,360 Physicians 299,600 Health Care & Social Assistance jobs 3.5% annual employment growth



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COLLIERS INTERNATIONAL 1233 W. Loop South Suite 900 Houston, Texas 77027 Main +1 713 222 2111

LISA R. BRIDGES Director of Market Research | Houston Direct +1 713 830 2125 Fax +1 713 830 2118 [email protected]

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Real Estate

Year End 2013 Houston Medical Office Report