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Medical Office Real Estate Demand Is Outpacing Supply In Dallas-Fort Worth

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Medical office space vacancy rates in Dallas-Fort Worth are more than a percentage point below the five-year average as demand remains strong in the region, according to a report from Transwestern.

The report says that the DFW market is undersupplied, but as rents rise, new construction may become more feasible in the future. Interest rates and material costs are rising, which has slowed down all new construction, and the medical office building space is no different. While rent is growing, it hasn’t kept up with other costs, so underwriting for new construction has been more difficult. But if the limited medical office space remains with increasing population in the region, rent prices will rise until new construction can be justified, the report says.

Prior to the pandemic, Dallas was the country’s second-most active medical office building construction market, behind only New York.

“There’s a definite need for increased health care services, more hospital campuses, and more doctors’ offices, but also the real estate that can house them,” says Andrew Matheny, research manager for Transwestern. “When you set that against the construction levels that have been declining over the last couple of years, that’s going to be a significant driver of rents and new development here in the next few years.”

While square footage under construction and 12-month deliveries are down compared to a year ago in the medical office space, those figures could soon be trending in the opposite direction. Vacancy rates in DFW are at 10.2 percent and were 11.6 percent one year ago. Gross rents are also up nearly 3 percent compared to a year ago.

The healthcare market overall continues to grow. Employment for the hospital space is up 4 percent compared to a year ago and 10 percent for other ambulatory service markets. Total available space is at 13.8 percent, which is below the five-year average for the region.

“In the last three to six months, we’re starting to see transactions come through that are bringing revenue in line with these higher costs,” Matheny says. “That may need to happen here for another couple of quarters before we start seeing more groundbreaking projects.”

South Dallas, in-town Dallas, and along the Dallas North Tollway have some of the lowest vacancy rates in Dallas, though there are zero projects under construction in-town and South Dallas, with just 21,000 square feet under construction near the tollway. In the Frisco/Legacy region, there are more than 150,00 sf under construction, but it has one of the highest vacancy rates in the region, at 13. 9 percent. The East Dallas suburbs (17.3 percent) and Grapevine/Southlake (23.1 percent) have higher vacancy rates than Plano/Legacy.

If the market responds as Transwestern is predicting, the new hybrid work environment will probably play a factor.

“If people are spending more time at home, they’re probably going to prefer to see physicians and providers that are close to where they live, so we may see a geographic rebalancing of health care services close to where people live,” Matheny says.

This trend is already making waves with the growing presence of urgent care centers, retail clinics, and free-standing emergency rooms popping up closer to where people live. Hospitals, too, are moving more services away from central hubs and into ambulatory care facilities. It isn’t just more convenient; caring for people outside the hospital is also cheaper.

Telehealth has surged during and after the pandemic, but Matheny doesn’t see it significantly impacting the medical office market.

“While it may allow a physician to reach more people without coming in, physicians still need physical spaces where they can see their patients face to face,” Matheny says. “From a leasing perspective, it’s been a very busy medical office space. There is a demand for it, and I think people want to see their doctor in person.”

 

Source: D CEO Magazine

Medical Office Commercial Real Estate Continues To Gain Strength

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Any medical facility likes to hear about improving conditions. That’s exactly what medical office buildings are experiencing: improved fundamentals that make property owners, investors, and operators healthy.

Colliers has a Q3 2022 report on healthcare real estate that covers performance in the top 100 U.S. markets.

“Despite economic concerns and industry challenges, the medical office property sector (MOB) continues to go from strength to strength, setting record highs for asking rents, sales volume, and pricing over the past four quarters,” read the report’s overview. “Demand is outpacing supply, vacancy remains tight, and capitalization (cap) rates have remained relatively stable. As a result, development activity is gaining momentum, reflecting confidence in the sector.”

But it comes with a caveat: the healthcare industry they depend on isn’t feeling so rosy. Pricing pressures are under way, and MOB owners that could mean monitoring and potential course of treatment.

On the plus side, average vacancy in the top 100 metros in the first half of 2022 was 8%. That was 40 basis points below the same period the previous year. The top 10 markets ranging from 6.3% in Boston to Houston’s 12.3%.

Top 100 average Los Angeles had the highest net MOB asking rents at $36.85 per square foot. That was quite the outlier.

“However, none of the other top 10 metros have an average MOB rent higher than $30 per square foot,” the report said. “Boston and New York are the next highest at $26.26 per square foot and $26.19 per square foot, respectively.” Although numbers for the lowest prices in the top 10 didn’t appear, a graph clearly showed that four—Atlanta, Boston, Dallas, and Philadelphia—were significantly below the national average.

To try pacing demand, construction rose, with completions of 14 million square feet in the four quarters ending with Q2 2022. That was up from the 13.7 million square feet from the previous 12-month period. MOB under construction rose more sharply, from 30.9 million to 37.1 million square feet.

And investor demand was strong at $17.2 billion in the four quarters ending with Q2 2022, the highest on record. Though that was largely due to the last quarter of 2021, which according to an included graph stood far above other quarters.

MOB is largely in a position to weather economic storms, as medical care is something difficult for many people to forego. But practitioners are also eying costs.

“In the face of reduced income and, in some cases, operating losses, some providers are cutting staff despite an overall shortage of employees in the healthcare industry.”

That would suggest real estate overhead will also be under scrutiny.

As an increasing amount of MOB is taken up by larger organizations—hospitals, HMOs, and other big operators—lowering those costs are likely to be on their agendas, and they have fiscal muscle to negotiate hard.

 

Source: GlobeSt.