Houston Medical Office Report 4Q-12

YEAR-END 2012 | MEDICAL OFFICE

COLLIERS HEALTHCARE SERVICES GROUP - Houston Texas

HEALTHCARE MARKET COMMENTARY

Houston Houston’s Medical Office Market Posts 984,525
SF of Positive Net Absorption in 2012
COLLIERS INTERNATIONAL | HOUSTON MEDICAL OFFICE | 2ND QUARTER 2010

Houston medical office buildings recorded 249,533 SF of positive net absorption
in the second half of 2012, pushing year-end 2012 net absorption to 984,525 SF.
HOUSTON MEDICAL OFFICE
By property class, Class A posted the largest amount of year-end positive net
MARKET INDICATORS
1ST HALF 2ND HALF absorption with 771,903 SF, followed by Class B properties posting 244,875 SF
2012 2012 of positive net absorption. Since mid-year, the citywide average vacancy rate
CITYWIDE NET decreased 10 basis points and the average quoted rental rate increased slightly
ABSORPTION (SF) 735K 250K from $23.11 to $23.17 per SF.
CITYWIDE SF DELIVERED 1.0M 207K
Houston’s medical office market is expected to benefit from both short- and
CITYWIDE AVERAGE
VACANCY
long-term regional trends. Disciplined development, with only 9 new buildings
12.6% 12.5%
added to inventory in 12 months, will relieve the pressure in filling the existing
CLASS A
AVERAGE VACANCY
vacant lease space.
14.4% 14.6%
CITYWIDE AVERAGE
RENTAL RATE
Overall, Houston’s economy remains among the strongest in the U.S. Houston
$23.11 $23.17
area home sales increased by 17.4% compared to sales one year ago. The
CLASS A AVERAGE
RENTAL RATE $28.92 $29.13
Houston metropolitan area added 85,000 jobs between November 2011 and
November 2012, an increase of 3.2%, and is on track to add the same amount
in 2013. Unemployment fell to 5.8% from 7.3% one year ago.

ABSORPTION, NEW SUPPLY & VACANCY RATES
JOB GROWTH & UNEMPLOYMENT
Absorption New Supply Vacancy
(Not Seasonally Adjusted) 1,200,000
NOV NOV 17%
UNEMPLOYMENT 2011 2012 1,000,000
15%
HOUSTON 7.3% 5.8% 800,000
TEXAS 7.2% 5.8% 600,000 13%
U.S. 8.2% 7.4%
400,000 11%
ANNUAL # OF JOBS
JOB GROWTH CHANGE ADDED 200,000 9%
HOUSTON 3.2% 85K
0 7%
TEXAS 2.6% 274K

U.S. 1.4% 1.9M (200,000) 5%

Accelerating success. 1

MEDICAL OFFICE & HEALTHCARE MARKET COMMENTARY | YEAR-END 2012 | COLLIERS INTERNATIONAL HOUSTON TEXAS

MEDICAL OFFICE Vacancy & Availability By property class, Class A posted the
EXISTING INVENTORY BY CLASS
Houston’s medical office occupancy largest amount of year-end positive
increased slightly during the second net absorption with 771,903 SF,
Class A
Class B followed by Class B properties
7,611,919 14,239,726 half of 2012 with the citywide average
28.2% 54.9% posting 244,875 SF of positive net
vacancy rate decreasing by 10 basis
points (bps) to 12.5% from 12.6%. absorption. In contrast, Class C
posted 32,253 SF of negative net
By property class, Class B vacancy absorption.
rates posted the largest decrease
during the second half of 2012, 50 Rental Rates
bps to 11.5% from 12.0% in 2Q 2012.
Quoted full-service rental rates for all
Class C Class A vacancy rates increased 20
medical office property classes
5,006,935 bps to 14.6 % from 14.4%, while
18.6% averaged $23.17/SF in 4Q 2012, an
Class C vacancy rates increased 30
increase from the $23.00/SF in mid-
Class A Class B Class C bps to 12.1% from 12.1%mid-year.
year. Medical office building landlords
Sublease space has not had a
continued to offer lease concessions
MEDICAL OFFICE significant impact on current vacancy
including free rent and generous
NET ABSORPTION BY CLASS rates, remaining below 1.0% of total
tenant improvement packages to
vacant space over five years. Of the
attract and retain credit worthy
Class A Class B Class C 3.4M SF of vacant space on the
tenants.
700,000 market at year-end 2012, only 61,180
SF was sublease space. By property class, on a bi-annual
600,000
basis, the average Class A rental rate
Disciplined medical office
500,000 of $29.13 per SF increased from
development activity has helped
$28.92 per SF, Class B increased to
400,000
prevent major upheavals in current
$22.57 from $22.43 per SF, and the
occupancy levels. There were only
average Class C rate increased from
300,000 seven (7) new buildings (152,108 SF)
$22.43 to $22.57 per square foot.
added to the market during 2011 and
200,000
just nine (9) buildings (1.26M SF)
100,000 delivered in 2012. The largest project
completed within the past two years
0 was the University of Texas MD
Anderson Cancer Center
Q1-10
Q2-10
Q3-10
Q4-10
Q1-11
Q2-11
Q3-11
Q4-11
Q1-12
Q2-12
Q3-12
Q4-12

(100,000)
Administration Building located at
7007 Bertner Avenue in the Texas
MEDICAL OFFICE Medical Center (895,600 SF owner
CLASS A & B VACANCY VS. RENTS occupied).
Presently, only one medical office
20% $35.00
building is under construction, The
18% $30.00 30,000 SF College Park Medical
Plaza located at 3117 College Park
$25.00
16% Dr. in The Woodlands. The project is
$20.00 23% pre-leased and is scheduled to
14% deliver June 2013.
$15.00
12% Absorption & Demand
$10.00
Houston medical office buildings
10% $5.00 recorded 249,533 SF of positive net
8% $0.00 absorption in the second half of 2012,
Q1- Q2- Q3- Q4- Q1- Q2- Q3- Q4- Q1- Q2- Q3- Q4- pushing year-end 2012 net absorption
10 10 10 10 11 11 11 11 12 12 12 12
to 984,525 SF.
Class A Vacancy Class B Vacancy
Class A Rents Class B Rents

COLLIERS INTERNATIONAL | P.2


SALES TRANSACTIONS Sales Activity Leasing Activity
Transaction activity remained solid Houston’s 2012 medical office leasing
during 2012, with 57 properties activity reached 823,000 SF. By
8515 Fannin Street1
changing hands. According to CoStar property class, Class B product led the
South Main/Medical Center Submarket
Comps, Houston medical sales market with 464,000 SF leased,
transactions had a total dollar volume of followed by Class A at 271,000 SF, then
$170M, averaging $223 per SF with a Class C at 88,000 SF.
7.4% capitalization rate.
Although the majority of new leases
Many of the transactions were multi- signed in the second half of the year
property sales, however, there were were in the 1,000 - 5,000 SF range,
several significant single property there were a few larger lease
RBA: 27,760 SF
Built: 1994 transactions that occurred. transactions.
Buyer: The Link Group, Inc.
The 27,760 SF 8515 Fannin MOB in the One of the larger transactions was
Seller: Treeline Partners Ltd
Sale Date: Sep 2012
South Main/Medical Center submarket Physician Endoscopy Center’s lease
1Colliers
was purchased by The Link Group, Inc. renewal of 14,080 SF at 3030 S
International Houston Transaction
in September 2012. Gessner Rd. in the Westchase
submarket.
1111 Augusta Drive The 80,740 SF 1111 Augusta MOB in
San Felipe/Voss Submarket the San Felipe/Voss submarket was Additional lease transactions include:
purchased by Sentinel Real Estate DermSurgery Associates, PA renewed
Corporation for $21.4M or $265 per SF. its lease of 14,000 SF in Greenpark I in
The property was built in 1977 and was the South Main/Medical Center
renovated in 2004.. submarket; Legacy Community Health
Center leased 3,700 SF at 8300
The 29,313 SF, Kingsland Medical
Homestead Rd. in the Northeast Near
Plaza located at 777 S Fry Rd. in the
RBA: 80,740 SF submarket; Woodlands Gynocology &
Katy Freeway West submarket was
Built: 1977/2004 Aesthetics leased 3,000 SF Medical
purchased by Finesa Real Estate Group
Buyer: Sentinel Real Estate Corp Arts Center II in The Woodlands
Seller: Healthcare Realty Trust Inc. for $4.3M or $147 per SF.
submarket.
Sale Date: Aug 2012 Investcorp JV Griffin Partners
Sale Price: $21.4M
purchased the Offices at Pin Oak Park,
Cap Rate: 6.81%
a 504,700 SF, five-building portfolio Source: Costar Group; Real Capital Analytics
from McCord Development for $78.7M
or $156 per SF. The property is located
Cordes Medical Building in the Bellaire submarket and was 90%
2655 Cordes Drive
occupied at the time of sale.
E Fort Bend Co/Sugar Land Submarket

Kingsland Medical Plaza
777 S Fry Rd
Katy Freeway West Submarket
RBA: 8,531 SF RBA: 29,313 SF
Built: 2005 Built: 1994
Buyer: Scuben Cordes, LLC Buyer: Finesa Real Estate Group
Seller: Jag At Cordes LLC Seller: Norvin Partners
Sale Date: Nov 2012 Sale Date: Dec 2012
Sale Price: $2.3M Sale Price: $4.3M
Cap Rate: 8.25%



TEXAS MEDICAL CENTER
The Texas Medical Center (TMC) – the world’s largest medical center – represents one of Houston’s major
economic drivers and core industries with an estimated regional annual economic impact of $14 billion. TMC is
also one of Houston’s largest employers with 92,500 employees, including physicians, scientists, researchers and
other advanced degree professionals in the life sciences.

The internationally-renowned, 1,300-acre TMC is the world’s largest medical complex with 52 member institutions,
including leading medical, academic and research institutions, all of which are non-profit and dedicated to the
highest standards of research, education and patient and preventive care. Member institutions include 13 hospitals
and two specialized patient facilities, as well as 19 renowned academic and research institutions virtually covering
all health-related careers – including two medical schools, four nursing schools, as well as schools of dentistry,
public health, and pharmacy – and 15 support services organizations. Over 69,000 students – including more than
7,000 international students – are affiliated with TMC, including high school, college and health profession graduate
programs. More than 7.1 million patients visited in 2011, including approximately 16,000 international patient visits.

The University of Texas M.D. Anderson Cancer In addition to the medical facilities and institutions of higher
Center ranked #1 in U.S. News & World Reports learning, TMC is also home to more than 280 professional
“Americas Best Hospitals” for cancer care. buildings. Overall, the complex covers over 18 miles of
public and private streets and roadways, with 45.5M SF of
existing patient, education, and research space.

TMC has continued to grow and expand over the past
several decades with the majority of growth occurring in the
past ten years. The Center is located in the 110-acre
University of Texas Research Park, a joint effort between the
University of Texas Health Science Center, M.D. Anderson
and General Electric Healthcare. In terms of future growth,
TMC approved $7.1 billion in building and infrastructure
investments between 2008 and 2012, with annual research
expenditures estimated at $1 billion.

TMC Patient Care Institutions TMC Academic and Research Institutions
The University of Texas M.D. Anderson Cancer Center Texas Children’s Hospital Neurological Research Institute
Texas Children’s Hospital Baylor College of Medicine
Memorial Hermann Hospital System The University of Texas Health Science Center at Houston
The Methodist Hospital The University of Texas M.D. Anderson Cancer Center
St. Luke’s Episcopal Hospital University of Houston College of Pharmacy
Lyndon B. Johnson General Hospital Rice University
Quentin Mease Community Hospital Texas A&M University Health Science Center
Ben Taub General Hospital Prairie View A&M University College of Nursing
The Institute for Rehabilitation and Research Texas Woman’s University Institute of Health Sciences
The Hospice at the Texas Medical Center Texas Southern University College of Pharmacy and Health
Sciences
Texas Heart Institute
Harris County Psychiatric Center
Shriners Hospitals for Children – Houston
Houston Academy of Medicine
Veterans Affairs Medical Center in Houston



HOUSTON AREA HOSPITAL LOCATIONS



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Enterprising Culture
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defined by our spirit of enterprise. Through a culture of service
excellence and a shared sense of initiative, we integrate the
resources of real estate specialists worldwide to accelerate the
success of our partners.

When you choose to work with Colliers, you choose to work
with the best. In addition to being highly skilled experts in their
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client engagement strategy that encourages cross-functional service integration, to our culture of caring.

We connect through a shared set of values that shape a collaborative environment throughout our organization that is unsurpassed in the
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Colliers International offers a comprehensive portfolio of real estate services to occupiers, owners and investors on a local, regional, national
and international basis.

LISA R. BRIDGES COLLIERS INTERNATIONAL | HOUSTON
Director of Market Research Houston 1300 Post Oak Boulevard
Direct +1 713 830 2125 Suite 200
Fax +1 713 830 2118 Houston, Texas 77056
lisa.bridges@colliers.com Main +1 713 222 2111
Accelerating success.


Houston Medical Office Report 4Q-12

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