Dallas-Fort Worth’s Medical Office Boom Can’t Match Population Growth

As the Dallas-Fort Worth area’s population continues to rise, there’s an urgent push to avert a healthcare crisis, with new medical office buildings struggling to keep pace due to construction challenges.

DFW’s population is set to increase by 8% by 2028, reaching 8.1 million in 2024. However, outpatient demand is projected to grow nearly three times faster than that. While billions of dollars are invested in hospital construction projects, many worry that the region is falling behind as higher financing costs, rising construction expenses, and outdated facilities complicate expansion.

Ethan Garner, Managing Director at JLL, highlighted the competition among healthcare providers to secure spots in the region’s managed care networks.

“There’s a foot race by the systems to position themselves and serve this growing population,” Garner said.

Dallas County’s growth is expected to continue, reaching 8% by 2030. Meanwhile, neighboring counties are set to grow even faster—Tarrant County by 12%, Collin County by 26%, and Denton County by 28%, according to the Texas Demographic Center. By 2060, the DFW area will be home to over 12 million residents.

“Dallas is one of the fastest-growing major cities, and every new resident needs access to healthcare,” said Chris Morgan, Director at Big Sky Medical.

The firm is focused on acquiring as many medical office buildings as possible to address the demand.

According to CBRE, Dallas is expected to be the third strongest market for medical office demand in 2024, behind Boston and Houston. The medical office construction pipeline is stronger than ever, with over 827,000 square feet of space set to open by the end of 2024, according to JLL. However, even that may not be enough.

In the fourth quarter of 2024, there were over 3,300 practicing physician groups in DFW, all competing for the available medical office space, JLL noted. With outpatient volume set to rise 22% in the next three years, far more space will be needed.

The rising costs of construction are a key obstacle. Construction financing costs have increased by 2-3%, with loans that used to carry 3% interest now closer to 6-7%. Additionally, tariffs on imported goods could push costs even higher, adding to the financial strain.

“Building space for providers without solid financial backing has become challenging,” Garner said.

For the available spaces, rents have increased by 1.4% year-over-year in 2024, reaching an average of $24.86 per square foot nationally. JLL predicts rent hikes will continue over the next two years as vacancy rates dip below 9.5%. In DFW, the 1.6 million square feet of medical leasing last year matched the five-year average, with vacancy rates falling to under 16% by Q4 2024.

Much of the available space, however, is older or shared with other types of tenants, including retail businesses.

“Retail-type locations are increasingly sought after for primary care and family practice due to their convenience,” said Garner.

Traditional office spaces with higher vacancy rates (over 27% in Q4 2024) often aren’t suitable for conversion into healthcare spaces due to design limitations, such as small elevators, inadequate power redundancy, and insufficient parking.

Despite these challenges, Class-A medical office spaces remain in high demand. However, more affordable Class-B spaces and retail spaces are also changing hands. Jerad Rector, President of Worldwide Commercial, noted that even older medical office buildings offer strong value after renovations. For instance, a 57,000 square-foot building in Plano was sold after being modernized, offering leases at $20 per square foot.

As rents for new spaces continue to climb, an increasing number of doctors are choosing to purchase their own office spaces.

“Medical condo sales are on the rise as more physicians and medical groups look to own rather than lease,” Garner observed.

In the near future, DFW’s growing population, especially those aged 40-65, will require even more healthcare. Medical providers are preparing now, hoping that financing and construction barriers will ease.

Emerging suburbs like Frisco, Plano, McKinney, and Allen are witnessing the latest medical condo projects, as more residents flock to these areas. Over half of the medical office projects in the pipeline are in West Collin County, including the fast-growing cities of Prosper and Celina. All four major healthcare systems in DFW have already established a presence in Collin County.

“It’s all about access,” said Garner. “Several health systems have invested in land in Prosper, building new community hospitals and outpatient medical facilities.”

Medical City Healthcare is expanding its McKinney hospital with a $142 million project set to begin this year.

“McKinney is one of the fastest-growing cities in the U.S., and we are committed to meeting the region’s healthcare needs,” said Mark Deno, CEO of Medical City McKinney.

Source: Bisnow