Eight-Year Juggernaut Adds 3.6M SF of Med Space

HOUSTON—Houston is one of the top markets for new medical office space and vacancy rates remain low while rents are pushing upward, according to reports from CBRE. With that top-of-market awareness at the forefront, financing is following suit.

A recent example is Berkadia arranging joint-venture equity for a 129,250-square-foot medical office building in Houston’s Heights neighborhood. The property was purchased by an affiliate of Simpkins Group Inc., a commercial real estate development and investment firm based in Houston.

Houston-based real estate investment firm Weingarten Realty Investors sold the property. Cutt Ableson, Mark Crosswell and Colin Marusak of Berkadia’s Houston office placed the joint venture equity with a Houston-based private equity firm.

Berkadia had to overcome the general perception of the Houston office market, Crosswell tells GlobeSt.com.

“Berkadia has found that in the joint venture equity market, single source checks ranging $3 million to $8 million are becoming hard to come by,” he said. “Institutional partners place large amounts of capital in a single transaction and typically will not consider smaller deals. Realizing this, we have built relationships with equity partners that are looking to place a smaller amount of capital in each transaction.”

Located at 1919 N. Loop West, the property is situated within Houston’s Inner Loop, providing access from downtown Houston and the rest of the metropolitan area. North Loop Freeway is less than five minutes away and Memorial Hermann Greater Heights Hospital is adjacent to the property.

“The 1919 North Loop transaction is well-positioned with day one cash flow and exposure to Memorial Hermann Hospital in the immediate vicinity,” Ableson tell GlobeSt.com. “The new owner will expound upon the asset’s medical tenancy and will continue to add value to the property.”

From 2010 through second quarter 2018, Houston added nearly 3.6 million square feet of medical office space, the most of any US market, according to the CBRE report. Houston also had the second-highest net absorption from second quarter 2017 to second quarter 2018, behind only Phoenix. Houston’s medical office vacancy dropped to 11.3% at the end of 2018, down from 12.7% halfway through the year.

Meanwhile, Houston’s rents rose nearly 3% in 2018 to $27.20 per square foot compared to $26.25 per square foot at the end of 2017.

Merger and acquisition activity is also a formative influence across the nation and the Houston market is accelerating the push toward lower-cost delivery locations such as outpatient centers, says CBRE. There were 115 M&A transactions in 2017, the highest annual total on record. One of the largest mergers in the nation was announced in October 2018. Memorial Hermann will merge with Baylor Scott & White, creating the largest nonprofit healthcare system in Texas and one of the largest in the nation.

The Houston market is on track for a robust 2019 with 15 medical office buildings under construction or in the late planning phases. That will add more than a million square feet of medical office space to the market. Deliveries dropped 33% in 2018 to 358,938 square feet, but comparatively, Houston was one of the top US markets for both total completion and square footage completed as part of existing inventory, according to the CBRE report.