COVID-19 Slows Real Estate In Houston's Normally Bustling Healthcare Industry

With Houston-area healthcare systems under financial strain, their real estate projects have taken a hit from the coronavirus, according to a new report.

The economic impact on Houston healthcare providers comes from a double whammy of higher COVID-19 expenses, and lower revenues from the state’s orders pausing elective surgeries, said the “Houston Healthcare Mid-Year 2020 Research and Forecast Report,” by Colliers International.

“With pressure to reduce expenses and a stagnant local economy, healthcare systems are tapping the brakes on previously planned expansions,” wrote report author Lisa Bridges, the company’s director of market research in Houston. “Some pre-pandemic planned construction projects and lease transactions are moving forward. The more ambitious capital projects have been put on hold.”

She wrote that healthcare providers are renewing leases at their current locations, rather than entering new long-term lease commitments to establish new locations in Houston’s growing suburbs.

Vacancy rates for Houston medical offices are 16%, compared to 15% for the same time in 2019, the report said. There is 41.4 million square feet of total inventory, and 700,000 square feet under construction, it added.

Leasing activity slowed down in March because of government stay-home orders, it explained. But in the future, healthcare providers may find new occupancy opportunities. Because COVID-19 has devastated retailers, there will be historically high levels of vacancies in shopping centers and free-standing facilities in urban and suburban locations.

“The retailization of healthcare is not a new trend as the shift to outpatient and off-campus locations have prompted providers to increasingly look to repurpose space in suburban retail centers providing more convenient locations for consumers,” wrote Bridges.

Across the nation, the investment transaction volume for medical office buildings has slowed down, especially in the second quarter of the year, because of COVID-19′s disruption to capital markets, the report said. Houston hasn’t escaped that national trend: Nine investment transactions happened in the first half of 2020, and two sales were recorded in the second quarter.

The report also lists major investment and construction activity for life sciences buildings by Texas Medical Center, Texas A&M, and Hines and 2ML Real Estate Interests. The projects are “poised to elevate Houston in the same strata as some of the other major life sciences hubs in the United States,” Bridges wrote.