Texas Medical Center Announces TMC BioPort campus

The Texas Medical Center announced plans for a 4th campus a massive biomanufacturing and medical supplies distribution center in Houston. TMC BioPort will be built on 500 acres south of Loop 610.

The newest campus is still in the early stages of development. However, once completed, it’s expected to double the overall size of the medical center and create 100,000 jobs for the Greater Houston metro, TMC President and CEO Bill McKeon said during

Texas Medical Center Announces TMC BioPort campus

The Texas Medical Center announced plans for a 4th campus a massive biomanufacturing and medical supplies distribution center in Houston. TMC BioPort will be built on 500 acres south of Loop 610.

The newest campus is still in the early stages of development. However, once completed, it’s expected to double the overall size of the medical center and create 100,000 jobs for the Greater Houston metro, TMC President and CEO Bill McKeon said during the Greater Houston Partnership’s annual State of the Texas Medical Center event this week. The medical center has been focused on expanding its presence in the life sciences ecosystem in recent years through projects such as TMC Innovation and TMC Helix Park. TMC Innovation opened in 2015 in the former Nabisco cookie factory.

TMC Helix Park, formerly known as TMC3, is a 37-acre life science campus that will encourage collaboration among industry, academia, and entrepreneurs through more than six million square feet of developed space as well as nearly 19 acres of green space. The TMC3 Collaborative Building, the first multi-institutional research facility in TMC’s history, is expected to finish next year. The project is expected to add 27,000 jobs to the area.

Currently, there are other notable major life science projects under construction in Houston in addition to TMC Helix Park. These include:

Biotechnology and the life science industry continue to expand in the Houston region with more than 100 institutions and companies attracting an increasing level of research and development funding annually. Venture capital funding in the life sciences sector in Houston has doubled from $124M in 2016 to $256M last year, according to Greater Houston Partnership.

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Houston Healthcare Report | Q2 2022

Overall Economic Activity

Economic activity was unchanged, on balance, since early July, with five Districts reporting slight to modest growth in activity and five others reporting slight to modest softening. Most Districts reported steady consumer spending as households continued to trade down and to shift spending away from discretionary goods and toward food and other essential items. Auto sales remained muted across most Districts, reflecting limited inventories and elevated prices. Hospitality

Overall Economic Activity

Economic activity was unchanged, on balance, since early July, with five Districts reporting slight to modest growth in activity and five others reporting slight to modest softening. Most Districts reported steady consumer spending as households continued to trade down and to shift spending away from discretionary goods and toward food and other essential items. Auto sales remained muted across most Districts, reflecting limited inventories and elevated prices. Hospitality and tourism contacts highlighted overall solid leisure travel activity with some reporting an uptick in business and group travel. Manufacturing activity grew in several Districts, although there were some reports of declining output as supply chain disruptions and labor shortages continued to hamper production. Despite some reports of strong leasing activity, residential real estate conditions weakened noticeably as home sales fell in all twelve Districts and residential construction remained constrained by input shortages. Commercial real estate activity softened, particularly demand for office space. Loan demand was mixed; while financial institutions reported generally strong demand for credit cards and commercial and industrial loans, residential loan demand was weak amid elevated mortgage interest rates. Nonfinancial services firms experienced stable to slightly higher demand. Demand for transportation services was mixed and reports on agriculture conditions across reporting Districts varied. While demand for energy products was robust, production remained constrained by supply chain bottlenecks for critical components. The outlook for future economic growth remained generally weak, with contacts noting expectations for further softening of demand over the next six to twelve months.

Federal Reserve Bank of Dallas

Growth in the Eleventh District economy continued at a modest pace, though job growth was quite robust. Manufacturing and service sector activity continued to slow, growing at a diminished clip from earlier this year. Retail sales were flat to down, and home sales remained relatively subdued. Loan demand continued to increase but at a markedly slower pace. Local nonprofits reported increased demand for rent and food assistance amid rising costs. The energy sector expanded further while the ongoing drought resulted in significantly lower crop production and culling of livestock herds. Wage growth remained highly elevated due to a tight labor market. Supply chain bottlenecks have begun easing and prices were not rising as fast, though inflation is still high. Outlooks were mixed as uncertainty remained elevated, and contacts voiced concern about slowing demand and the risk of a recession stemming from high prices, weakening consumer sentiment, and rising interest rates.

Construction and Real Estate

Housing market activity remained weak, particularly at the entry level. Sales were off notably in July but improved in August partly due to a dip in mortgage rates. Home prices were flat to down, and incentives were becoming more widespread. Outlooks were uncertain, with contacts expecting further weakness ahead. Apartment leasing was solid and in line with pre-COVID levels, though momentum has slowed from its 2021 highs. Occupancy was flat to down and rent growth remained elevated but was declining from its earlier feverish pace. Demand for office space was mixed and construction subdued, while industrial leasing and construction remained high.

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Job Growth Surges in Houston

The first half of ’22 was the strongest opening on record for Houston’s economy. Job growth surged. The unemployment rate fell. Houston’s civilian labor force grew significantly. Exports set a record. Container traffic soared. Crude topped $100 per barrel. The rig count approached pre-pandemic levels.

Metro Houston created 84,600 jobs in the first half of ’22. That’s the best start on record for the region, better than any year in the ’80s, when the

Job Growth Surges in Houston

The first half of ’22 was the strongest opening on record for Houston’s economy. Job growth surged. The unemployment rate fell. Houston’s civilian labor force grew significantly. Exports set a record. Container traffic soared. Crude topped $100 per barrel. The rig count approached pre-pandemic levels.

Metro Houston created 84,600 jobs in the first half of ’22. That’s the best start on record for the region, better than any year in the ’80s, when the domestic rig count topped 4,500, or the early ’10s, when the Eagle Ford Shale boom lead Houston out of the Great Recession.

The unemployment rate in Houston edged down to 4.6 percent in June, and in Texas overall, it dropped to 4.1 percent—a continuation of the steady improvements that have occurred throughout the pandemic

Houston Office Market

Houston’s office market posted negative net absorption in Q2 2022, recording (-224,211) square feet. The overall average vacancy rate rose marginally by 10 basis points between quarters from 23.4% to 23.5%. Office inventory remained unchanged, as no new inventory was added and there is 2.0 million SF of office space under construction. Average rental rates increased over the year. Houston’s Class A overall average full-service rental rate rose from $35.10 per square foot in Q2 2021 to $36.29 per square foot in Q2 2022. Leasing activity remained steady over the quarter, recording 2.9 million square feet, which includes renewals.

Key Takeaways

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Houston Industrial Market

Houston’s industrial market continued to gain momentum as leasing velocity reached over 10 million square feet in the second quarter. The increase in demand for space continued to spur new development with over 21 million square feet under construction and an additional 65 million square feet proposed or in the final planning stage. Houston’s industrial market recorded 6.6 million square feet of positive net absorption in the second quarter. The vacancy rate decreased 280 basis points annually from 8.5% in Q2 2021 to 5.7% in Q2 2022.

Key Takeaways

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Houston Retail Market

Houston’s vacancy rate decreased 50 basis points from 5.6% to 5.1% over the quarter as more inventory was leased than new inventory delivered. Houston’s retail sector recorded 1.3 million square feet of positive net absorption in the second quarter, pushing the year-to-date total absorption to 2.4 million square feet. Year-to-date leasing activity reached 3.1 million square feet, an increase of 24% when compared to mid-year 2021. The average asking rental rate increased 2.0% on an annual basis.

Key Takeaways

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Houston Healthcare Real Estate Market

Houston’s medical office building (MOB) market posted 531,293 square feet of positive net absorption in the first half of 2022, an increase over the 219,659 square feet recorded in the first half of 2021. The vacancy rate fell over the year from 13% to 12.1%. Houston’s MOB inventory increased slightly with 514,775 square feet of new inventory added in the second half of 2022 and there is 2.3 million SF of MOB space under construction. The average asking NNN rental rate rose annually from $22.80 per SF to $23.23 per SF. Transaction volume decreased on an annual basis and increased on a semi-annual basis. According to our data provider Revista, the 2022 mid-year transaction volume is just over $298.7 million and the average CAP rate is 6.17%.

Key Takeaways

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Office Occupancy is Increasing, but the Return to the Office Has Been Slow

Office return dates have been a moving target throughout the pandemic, particularly over the last 12 months, with plans being stalled by the Delta and Omicron variants in turn. Occupancy is comfortably above 50% in the leading Texas metros of Austin, Dallas, and Houston which has consistently been above other major markets according to Kastle’s Back to Work Barometer.

As we approach the end of the third quarter as

Office Occupancy is Increasing, but the Return to the Office Has Been Slow

Office return dates have been a moving target throughout the pandemic, particularly over the last 12 months, with plans being stalled by the Delta and Omicron variants in turn. Occupancy is comfortably above 50% in the leading Texas metros of Austin, Dallas, and Houston which has consistently been above other major markets according to Kastle’s Back to Work Barometer.

As we approach the end of the third quarter as of late it appears leasing activity is picking up as companies appear to have a firmer sense of direction toward their office leasing decisions and hybrid work solutions.

Austin Office Market

Austin has continued to outperform most comparable markets in both leasing and post-pandemic office use. We continued to see demand and competition for Class A offices in core markets (CBD and surrounding, along with the Domain), which led to relatively flat vacancy and average rates which continued to trend flat or slightly up. A mixture of high-tech and professional services led the way with new leases ranging from 60k to 220k rsf spread throughout the market. Suburban markets have continued to lag in activity resulting in a slight increase in overall vacancy, with a few Landlords (primarily far west) beginning to advertise lower rates and/or increased concessions.

Key Takeaways

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Dallas – Fort Worth Office Market

The Dallas-Fort Worth office market is showing mixed signals. Landlords are still pushing some of the highest rents the market has ever seen despite the highest recorded vacancy rate and minuscule absorption through mid-year. The second half of 2022 is poised for a strong rebound due to the fact that YTD leasing activity is up to pre-Covid levels. The biggest challenge the market faces right now is that many tenants still have not defined their work-from-home policies and are not quite sure if they need more space or should give some space back. Many companies are waiting to see what competitors do before making a decision.

Key Takeaways

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Houston Office Market

Houston’s office market posted negative net absorption in Q2 2022, recording (-224,211) square feet. The overall average vacancy rate rose marginally by 10 basis points between quarters from 23.4% to 23.5%. Office inventory remained unchanged, as no new inventory was added and there is 2.0 million SF of office space under construction. Average rental rates increased over the year. Houston’s Class A overall average full-service rental rate rose from $35.10 per square foot in Q2 2021 to $36.29 per square foot in Q2 2022. Leasing activity remained steady over the quarter, recording 2.9 million square feet, which includes renewals.

Key Takeaways

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Houston Highlights

Houston’s medical office building (MOB) market posted 531,293 square feet of positive net absorption in the first half of 2022, an increase over the 219,659 square feet recorded in the first half of 2021. The vacancy rate fell over the year from 13% to 12.1%. Houston’s MOB inventory increased slightly with 514,775 square feet of new inventory added in the second half of 2022 and there is 2.3 million SF of MOB space under construction. The average asking NNN rental rate rose annually from $22.80 per SF to $23.23 per SF. Transaction volume decreased on an annual basis and increased on a semi-annual basis. According to our data provider Revista, the 2022 mid-year transaction volume is just over $298.7 million and the average CAP rate is 6.17%.

Key Takeaways

Market Fundamentals

Executive Summary

The Houston Healthcare real estate market continues to demonstrate strong fundamentals despite the lingering effects of the Covid Pandemic and increasing concerns over the economy’s direction and inflationary pressures. In addition, major health systems continue to expand their facilities both on campus and in off-campus outpatient settings to accommodate Houston’s expanding population and robust job growth.

Metro Houston created 84,600 jobs in the first half of ‘22, the strongest opening on record for Houston’s economy. In addition, the Healthcare sector is fully recovered from its pandemic losses adding 47,900 jobs in the first half of 2022.

As with so many other CRE sectors, the pandemic rapidly accelerated shifts in medical office space that was already underway long before COVID-19’s arrival.

Driven by advancing technology, increasing competition, and pricing pressure, healthcare delivery is rapidly evolving to become more consumer-centric, moving off the hospital campus to an ambulatory setting.

We continue to see healthcare providers add outpatient space and increasingly take on retail space as part of the outpatient clinic real estate strategy, particularly in Houston’s fast-growing suburban submarkets.

On the supply side, rapidly rising material costs and labor shortages cause delivery delays and extended fit-out periods for new properties.

The greater Houston medical office building (MOB) market includes nine counties and has 43,175,700 square feet, based on statistics from Revista, a national database of healthcare properties.

Construction

At mid-year 2022, an additional 2,387,200 square feet of MOB space is under construction, according to statistics from Revista.

Houston Methodist started construction on its new $1.4B hospital tower on its campus in the Texas Medical Center and also broke ground on its ninth hospital in the Houston metro in the 290 corridor. The new 471,000 SF hospital will be modeled after the comprehensive Houston Methodist West and Houston Methodist- The Woodlands hospitals. Houston Methodist also broke ground on a third MOB (150,000 SF) at the Houston Methodist West Campus.

Construction continues to progress on the Horizon Tower, a 500,000-square-foot Medical Office and Life Sciences building at the Gateway to the Texas Medical Center, with delivery expected in Q1 of 2024.

Kelsey-Seybold Clinic announced plans today to build a 15,000-square-foot clinic in League City and recently opened its new five-story, 125,000 square feet medical office building in the Memorial Villages in West Houston

Memorial Herman Healthcare started a 125,000-square-foot expansion of its Katy Hospital Campus and broke ground on a new rehabilitation facility in Webster.

Lease Rates

Rent in Houston properties continued to rise slightly in the first half of 2022 and ended at an average lease rate (all types) of $23.23 per square foot. Asking rates increased 2.2 percent over the previous year.

Occupancy

Houston occupancy fell during the early part of the pandemic and rose during 2021 and continued to rise in Q1 2022. The occupancy rate fell slightly over the quarter from 88.2 percent to 87.9 percent in Q2 2022.

Investment Sales

Investment sales volumes in the Houston medical office buildings (MOB) sector started off strong in 2022 but slowed in the second quarter of 2022.

Twelve (12) Houston area Medical Office Buildings totaling 498,215 square feet sold in the first quarter of 2022 compared to seven (7) totaling 292,007 square feet in the second quarter.

The most notable Houston area MOB transactions in the second quarter included:

By Year-End, the MOB sales volume for the year in Houston is likely to be record-setting fueled by the recently closed merger of two of the sector’s largest publicly traded real estate investment trusts: Healthcare Trust of America (HTA) into a newly formed Nashville, Tenn.-based Healthcare Realty Trust Inc. Twenty (20) Houston area MOB’s totaling approximately 1.8 million square feet were part of the blockbuster transaction which closed in late July.

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The U.S. industrial sector continued to show its strength, posting favorable fundamentals through midyear. The remainder of 2022, however, should feel the pressure of the headwinds affecting the market – Amazon’s scaling back, continuous interest rate hikes, labor and supply issues, transportation costs, and land availability. The industrial sector is not immune to these challenges and may see occupiers scale back in the latter half of the year.

Overall net absorption totaled 119.3 million square feet in the second quarter, a 6% increase over the previous quarter. New supply rose 25.6% year-over-year and the vacancy rate dropped 121 basis points from this time last year to 3.7%.

Top Markets

A total of 15 markets posted occupancy gains greater than five million square feet at midyear, including Chicago, Phoenix, Houston, Dallas, and Atlanta. On the other hand, just four industrial markets posted negative absorption – Boston, Shenandoah Valley/I-81 Corridor, New Hampshire, and Columbia. The markets experiencing the most activity growth (absorption as a percent of inventory) include emerging markets such as Savannah, Charleston, Reno/Sparks, Austin, and Salt Lake City. Interestingly, our top five growth markets are all port or port-adjacent markets, indicative of the industry’s need to move away from the nation’s busiest ports to alleviate strain on the supply chain.

Construction

Midyear new supply rose 25.6% year-over-year, and the industrial construction pipeline remains incredibly full. A total of 197.9 million square feet was completed at midyear, and a record 613.4 million square feet were under construction at the close of the quarter. In addition, there are currently over 177 facilities under construction that are one million square feet or larger. Despite material delays and labor shortages affecting many areas in the country, projects continue to break ground at a record pace. The Dallas-Fort Worth industrial market is the most active development market, with 58.8 million square feet under construction.

Absorption

Nearly 232 million square feet were absorbed at midyear, just 2.5% below last year’s total. Since the fourth quarter of 2020, occupancy gains exceeded more than 100 million square feet each quarter, as 119 million square feet were absorbed during the second quarter. The hold the e-commerce industry had on the industrial sector is beginning to ease, as growth in the third-party logistics (3PL) sector outpaced e-commerce activity. Market growth for 3PL firms can be attributed to the surge in container volume at our nation’s seaports, as well as the need for more effective inventory management by distributors.

Vacancy  | Rental Rates

The overall vacancy rate declined 121 basis points year-over-year to 3.7% at the end of the second quarter. This marks the lowest vacancy rate ever recorded in the U.S. Tightening markets and an abundance of new industrial supply drove up asking rents for warehouse/distribution space to $7.30 per square foot per year in the second quarter, 12.5% higher than the same time last year and the highest asking rent on record. As the pace of development surges and demand for final-mile facilities increases, industrial asking rents will continue to soar, especially in seaport and port-adjacent markets

U.S. Industrial Overview

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Austin has continued to outperform most comparable markets in both leasing and post-pandemic office use

Austin has continued to outperform most comparable markets in both leasing and post-pandemic office use

Boots On The Ground

Austin has continued to outperform most comparable markets in both leasing and post-pandemic office use. We continued to see demand and competition for Class A offices in core markets (CBD and surrounding, along with the Domain), which led to relatively flat vacancy and average rates which continued to trend flat or slightly up. A mixture of high-tech and professional services led the way with new leases ranging from 60k to 220k rsf spread throughout the market. Suburban markets have continued to lag in activity resulting in a slight increase in overall vacancy, with a few Landlords (primarily far west) beginning to advertise lower rates and/or increased concessions.

Subleases in and around the core performed well during the second quarter, with multiple 20k-50k rsf spaces successfully subleased at very respectable rates. Activity has waned significantly as you move away from the CBD, and the majority of suburban spaces that were successfully subleased did so at discounted effective deals. We have seen a few large blocks of sublease space come to the market in the past couple months, and we’re hearing rumors that this trend could continue for Q3.

Key Takeaways

The Market, at a Glance

Construction pricing has remained high due to activity and competition for subs, however, we started to see a few projects come in lower than expected in June which could be a signal toward returning to some sort of equilibrium. Timeframes for plan development continue to push longer than typical due to most of the prominent MEP shops working at capacity, and city of Austin permitting timelines change monthly.

Future Forecast

We believe Austin will continue to see a good deal of demand which will protect against short term hits to occupancy rates, but the uncertainty of the national economy combined with more large companies considering flex programs makes us less bullish than previous quarters. Its most likely that overall market direct rates remain flat, while sublease rates will likely go down due to increased competition and less immediate prospects. Based on our current tracking of possible users (either new to the market or expanding), the overall market should remain healthy, albeit a little more Tenant friendly. Potential “market movers” we will be watching for include (i) significant blocks of sublease space coming to market, likely from tech users, and (ii) major shifts in the national economy which notably impact hiring and employment numbers.

Austin Capital Markets

The second quarter of 2022 saw a rapid change to the investment sales environment in Austin primarily driven by rapid interest rate increases. The current environment has caused some lenders to sit on the sidelines, especially for office product, and there is little agreement on market CAP rates for different product types. There is also little consensus on exit cap rates. We saw some buyers drop contracts in the second quarter given the changes in the interest rate environment. Despite these headwinds, Collier Austin closed three investment sales transactions in the $3-$20MM range a in the second quarter and have two other properties under contract. Centrally located properties in Austin continue to see a high level of interest. Suburban office buildings struggle with a pricing gap between buyer and seller expectations, especially buildings with large vacancy or owner/user buildings. We expect to see more stability toward the end of the year as interest rates stabilize.

Austin Office Market Statistics Q2 2022

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