4Q 2012 Medical Office Report | Public Health | Health Care

YEAR-END 2012 | MEDICAL OFFICE

COLLIERS HEALTHCARE SERVICES GROUP - Houston Texas

HEALTHCARE MARKET COMMENTARY

Houston

Houston’s Medical Office Market Posts 984,525 SF of Positive Net Absorption in 2012
Houston medical office buildings recorded 249,533 SF of positive net absorption in the second half of 2012, pushing year-end 2012 net absorption to 984,525 SF. By property class, Class A posted the largest amount of year-end positive net absorption with 771,903 SF, followed by Class B properties posting 244,875 SF of positive net absorption. Since mid-year, the citywide average vacancy rate decreased 10 basis points and the average quoted rental rate increased slightly from $23.11 to $23.17 per SF. Houston’s medical office market is expected to benefit from both short- and long-term regional trends. Disciplined development, with only 9 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. Houston area home sales increased by 17.4% compared to sales one year ago. The Houston metropolitan area added 85,000 jobs between November 2011 and November 2012, an increase of 3.2%, and is on track to add the same amount in 2013. Unemployment fell to 5.8% from 7.3% one year ago.

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HOUSTON MEDICAL OFFICE MARKET INDICATORS 1ST HALF 2ND HALF 2012 2012
CITYWIDE NET ABSORPTION (SF) CITYWIDE SF DELIVERED CITYWIDE AVERAGE VACANCY CLASS A AVERAGE VACANCY CITYWIDE AVERAGE RENTAL RATE CLASS A AVERAGE RENTAL RATE $28.92 $29.13 $23.11 $23.17 14.4% 14.6% 12.6% 12.5% 735K 1.0M 250K 207K

ABSORPTION, NEW SUPPLY & VACANCY RATES
JOB GROWTH & UNEMPLOYMENT (Not Seasonally Adjusted) NOV NOV 2011 2012 UNEMPLOYMENT
HOUSTON TEXAS U.S. JOB GROWTH HOUSTON TEXAS U.S. 7.3% 7.2% 8.2% ANNUAL CHANGE 3.2% 2.6% 1.4% 5.8% 5.8% 7.4% # OF JOBS ADDED 85K 274K 1.9M

1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 (200,000)

Absorption

New Supply

Vacancy

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

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MEDICAL OFFICE & HEALTHCARE MARKET COMMENTARY | YEAR-END 2012 | COLLIERS INTERNATIONAL HOUSTON TEXAS

MEDICAL OFFICE EXISTING INVENTORY BY CLASS
Class A 7,611,919 28.2%
Class B 14,239,726 54.9%

Vacancy & Availability
Houston’s medical office occupancy increased slightly during the second half of 2012 with the citywide average vacancy rate decreasing by 10 basis points (bps) to 12.5% from 12.6%. By property class, Class B vacancy rates posted the largest decrease during the second half of 2012, 50 bps to 11.5% from 12.0% in 2Q 2012. Class A vacancy rates increased 20 bps to 14.6 % from 14.4%, while Class C vacancy rates increased 30 bps to 12.1% from 12.1%mid-year. Sublease space has not had a significant impact on current vacancy rates, remaining below 1.0% of total vacant space over five years. Of the 3.4M SF of vacant space on the market at year-end 2012, only 61,180 SF was sublease space. Disciplined medical office development activity has helped prevent major upheavals in current occupancy levels. There were only seven (7) new buildings (152,108 SF) added to the market during 2011 and just nine (9) buildings (1.26M SF) delivered in 2012. The largest project completed within the past two years was the University of Texas MD Anderson Cancer Center Administration Building located at 7007 Bertner Avenue in the Texas Medical Center (895,600 SF owner occupied). Presently, only one medical office building is under construction, The 30,000 SF College Park Medical Plaza located at 3117 College Park Dr. in The Woodlands. The project is 23% pre-leased and is scheduled to deliver June 2013.

By property class, Class A posted the largest amount of year-end positive net absorption with 771,903 SF, followed by Class B properties posting 244,875 SF of positive net absorption. In contrast, Class C posted 32,253 SF of negative net absorption.

Rental Rates
Quoted full-service rental rates for all medical office property classes averaged $23.17/SF in 4Q 2012, an increase from the $23.00/SF in midyear. Medical office building landlords continued to offer lease concessions including free rent and generous tenant improvement packages to attract and retain credit worthy tenants. By property class, on a bi-annual basis, the average Class A rental rate of $29.13 per SF increased from $28.92 per SF, Class B increased to $22.57 from $22.43 per SF, and the average Class C rate increased from $22.43 to $22.57 per square foot.

Class C 5,006,935 18.6%

Class A

Class B

Class C

MEDICAL OFFICE NET ABSORPTION BY CLASS Class A
700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 (100,000) Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11 Q3-11 Q4-11 Q1-12 Q2-12 Q3-12 Q4-12
$35.00 $30.00 $25.00 $20.00 14% $15.00 12% 10% 8% $10.00 $5.00

Class B

Class C

MEDICAL OFFICE CLASS A & B VACANCY VS. RENTS
20% 18% 16%

Absorption & Demand
Houston medical office buildings recorded 249,533 SF of positive net absorption in the second half of 2012, pushing year-end 2012 net absorption to 984,525 SF.

Q1- Q2- Q3- Q4- Q1- Q2- Q3- Q4- Q1- Q2- Q3- Q410 10 10 10 11 11 11 11 12 12 12 12

$0.00

Class A Vacancy Class A Rents

Class B Vacancy Class B Rents
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MEDICAL OFFICE & HEALTHCARE MARKET COMMENTARY | YEAR-END 2012 | COLLIERS INTERNATIONAL HOUSTON TEXAS

SALES TRANSACTIONS

Sales Activity
Transaction activity remained solid during 2012, with 57 properties changing hands. According to CoStar Comps, Houston medical sales transactions had a total dollar volume of $170M, averaging $223 per SF with a 7.4% capitalization rate. Many of the transactions were multiproperty sales, however, there were several significant single property transactions that occurred. The 27,760 SF 8515 Fannin MOB in the South Main/Medical Center submarket was purchased by The Link Group, Inc. in September 2012. The 80,740 SF 1111 Augusta MOB in the San Felipe/Voss submarket was purchased by Sentinel Real Estate Corporation for $21.4M or $265 per SF. The property was built in 1977 and was renovated in 2004.. The 29,313 SF, Kingsland Medical Plaza located at 777 S Fry Rd. in the Katy Freeway West submarket was purchased by Finesa Real Estate Group for $4.3M or $147 per SF. Investcorp JV Griffin Partners purchased the Offices at Pin Oak Park, a 504,700 SF, five-building portfolio from McCord Development for $78.7M or $156 per SF. The property is located in the Bellaire submarket and was 90% occupied at the time of sale.

Leasing Activity
Houston’s 2012 medical office leasing activity reached 823,000 SF. By property class, Class B product led the market with 464,000 SF leased, followed by Class A at 271,000 SF, then Class C at 88,000 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. One of the larger transactions was Physician Endoscopy Center’s lease renewal of 14,080 SF at 3030 S Gessner Rd. in the Westchase submarket. Additional lease transactions include: DermSurgery Associates, PA renewed its lease of 14,000 SF in Greenpark I in the South Main/Medical Center submarket; Legacy Community Health Center leased 3,700 SF at 8300 Homestead Rd. in the Northeast Near submarket; Woodlands Gynocology & Aesthetics leased 3,000 SF Medical Arts Center II in The Woodlands submarket.

8515 Fannin Street1 South Main/Medical Center Submarket

RBA: Built: Buyer: Seller: Sale Date:
1Colliers

27,760 SF 1994 The Link Group, Inc. Treeline Partners Ltd Sep 2012

International Houston Transaction

1111 Augusta Drive San Felipe/Voss Submarket

RBA: Built: Buyer: Seller: Sale Date: Sale Price: Cap Rate:

80,740 SF 1977/2004 Sentinel Real Estate Corp Healthcare Realty Trust Inc. Aug 2012 $21.4M 6.81%

Source: Costar Group; Real Capital Analytics

Cordes Medical Building 2655 Cordes Drive E Fort Bend Co/Sugar Land Submarket

Kingsland Medical Plaza 777 S Fry Rd Katy Freeway West Submarket
RBA: Built: Buyer: Seller: Sale Date: Sale Price: Cap Rate: 8,531 SF 2005 Scuben Cordes, LLC Jag At Cordes LLC Nov 2012 $2.3M 8.25% RBA: Built: Buyer: Seller: Sale Date: Sale Price: 29,313 SF 1994 Finesa Real Estate Group Norvin Partners Dec 2012 $4.3M

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MEDICAL OFFICE & HEALTHCARE MARKET COMMENTARY | YEAR-END 2012 | COLLIERS INTERNATIONAL HOUSTON TEXAS

TEXAS MEDICAL CENTER
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 $14 billion. TMC is also one of Houston’s largest employers with 92,500 employees, including physicians, scientists, researchers and other advanced degree professionals in the life sciences. The internationally-renowned, 1,300-acre TMC is the world’s largest medical complex with 52 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. Member institutions include 13 hospitals and two specialized patient facilities, as well as 19 renowned academic and research institutions virtually covering all health-related careers – including two medical schools, four nursing schools, as well as schools of dentistry, public health, and pharmacy – and 15 support services organizations. Over 69,000 students – including more than 7,000 international students – are affiliated with TMC, including high school, college and health profession graduate programs. More than 7.1 million patients visited in 2011, including approximately 16,000 international patient visits.
The University of Texas M.D. Anderson Cancer Center ranked #1 in U.S. News & World Reports “Americas Best Hospitals” for cancer care.

In addition to the medical facilities and institutions of higher learning, TMC is also home to more than 280 professional buildings. Overall, the complex covers over 18 miles of public and private streets and roadways, with 45.5M 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. In terms of future growth, TMC approved $7.1 billion in building and infrastructure investments between 2008 and 2012, with annual research expenditures estimated at $1 billion.

TMC Patient Care Institutions
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
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

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MEDICAL OFFICE & HEALTHCARE MARKET COMMENTARY | YEAR-END 2012 | COLLIERS INTERNATIONAL HOUSTON TEXAS

HOUSTON AREA HOSPITAL LOCATIONS

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MEDICAL OFFICE & HEALTHCARE MARKET COMMENTARY | YEAR-END 2012 | COLLIERS INTERNATIONAL HOUSTON TEXAS

The Colliers Advantage
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LISA R. BRIDGES Director of Market Research Houston Direct +1 713 830 2125 Fax +1 713 830 2118 lisa.bridges@colliers.com

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