Medical Office Category Gaining Traction

Closer to town, there's little doubt that the Texas Medical Center has generated its share of investment stories in the past year. The Baylor College of Medicine sold a 154,950-sf building and the Indianapolis-based Windrose Medical Properties Trust bough a 79,040-sf professional plaza in the area.

Mark Preston, vice president with Moody Rambin Interests' Houston office, says the investment and development trend is certain to continue in the Texas Medical Center. "TMC owns much of the land going to the west loop and will keep it for future growth," he says. "As they grow, peripheral office buildings will continue to grow with them."

But it's not just medical center properties that have been making real estate news. The Mathis Group launched construction in recent months on a 60,000-sf Medical Arts Building in Katy while work is wrapping up on a 33,400-sf medical office building near St. Luke's Community Medical Center in the Woodlands.

Sanford Criner, executive vice president in Houston for CB Richard Ellis, says the outlying developments and deals aren't necessarily new, but they've "only just been noticed recently." The stepped-up development pace has been particularly noticeable near mixed-use, master-planned residential developments.

Robert Kramp, vice president and director of Grubb & Ellis Co.'s national client services, says no matter where the developments and investments are, logically enough, that medical office product will trail hospitals and major medical centers, where land tends to be somewhat more expensive. "Owners add an additional premium to the rent, an additional price per sf," he says. As a result, rents can be 25% to 30% higher than those in a standard class A office building.

Furthermore, lease negotiations on such properties can be difficult. "These tend to be difficult because they're so niche-y," Preston says. "If you have a practice and want to work at one of the buildings at Methodist, you'll get space on a priority basis depending on your affiliation with the hospital." Lease deals become less problematic when it comes to private medical buildings, he adds.

Likewise costs are higher on the development end as well. Criner says medical developments aren't too different from regular office product, but they do require larger floor plans, more HVAC and electricity redundancies and more parking up close ratios that is more conveniently placed.

Investment into medical office properties isn't for the small investor. "I'd say that most of the office building investments we've seen here lately have been done by REITs and large institutions," Criner says. "They're not the moms and pops, but the larger institutions." Physician groups frequently are involved in ownership, he adds.

Kramp says medical office investors tend to be planning longer-term holds than they are for an office product. "The holding period on these is typically beyond a five-year horizon," he says. "It's a niche market. Those operating in that niche know that the space can't be flexible. This is a targeted selection in which location, build-out and accessibility are all key factors."

The experts point out that demand for and development of medical office product isn't likely to taper off anytime soon. "The aging of our markets and the fact they're moving to the suburbs is what will continue to drive it," Criner says. "When it comes to medical product, they need to get to where the people are."