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Healthcare Hits Speed Bumps in Houston as Demand Remains Strong

The new Memorial Hermann Woodlands building is among the latest supply of healthcare properties to hit the Houston market.

The new Memorial Hermann Woodlands building is among the latest supply of healthcare properties to hit the Houston market.

The Houston healthcare sector has gotten off to a slow start in 2017. Financial concerns are impacting several healthcare systems as they adapt to a changing marketplace.

Industry challenges such as increasing technology costs, as well as changes in payer mixes and reimbursement rates, have impacted organizations’ operating models as a whole. While the majority of organizations have effectively adjusted or are adapting to the change, companies such as CHI St. Luke’s Health, Adeptus Health Inc. and Foundation Healthcare have not fared as well, resulting in a sluggish start to the year.

In late March, CHI St. Luke’s announced another round of layoffs, stating that it would eliminate more than 459 jobs and an additional 161 vacant positions statewide. This is the fourth round of layoffs CHI has announced over the previous two years as the company continues to struggle with lower patient volumes, reduced reimbursement via Medicaid and Medicare, and increased technology-related operating costs.

Stuart Showers, Transwestern

Adeptus Health, a freestanding emergency room operator with more than 29 Houston-area locations, appears to be headed for bankruptcy, having announced in March that it would be hiring a restructuring chief. Adeptus has grown rapidly over the past several years, initially opening facilities that lacked hospital network affiliations. This operating model led to problems for both Adeptus and its consumers, as patients were met with exorbitant bills not covered by insurance and Adeptus struggled to collect fees directly from patients.

Finally, the quarter’s largest negative absorption event stemmed from Foundation Healthcare. Foundation purchased the bankrupt University General Hospital — a 69-bed hospital at 7501 Fannin St. — for $33 million last year. After operating the hospital for less than a year, Foundation itself was also forced to file for bankruptcy, putting the 109,000-square-foot hospital back on the market. 

Strong Fundamentals Despite Losses

Activity for the quarter remained solid as healthcare providers continue to seek out locations that align with population growth and an effective insurance payer mix.

Early this quarter, TexPharma announced that it will begin construction on a 210,000-square-foot building situated on 19 acres in Rosenberg, Texas. TexPharma plans to consolidate operations nationwide into the Rosenberg Business Park. The facility will initially house 80 employees and could grow to 500.

On the leasing side, continued demand for medical office space has resulted in a rapid appreciation of rental rates. For Class A medical office buildings, average triple-net asking rents increased by 3.5 percent year-over-year, and more than 1.6 percent over the first quarter of 2017, ending at $24.30 per square foot

Year-over-year job numbers continue to suggest that the Houston healthcare sector is positioned for long-term growth, with 8,300 jobs created during the 12 months ending February 2017. However, a look at the first two months of 2017 show losses in the sector to the tune of 1,900 jobs, occurring primarily in ambulatory and healthcare services. Considering the recent layoffs announced by CHI St. Luke’s, the short-term prognosis is for minimal job growth as the market absorbs the additional losses.

With roughly 5.1 million square feet of hospital and medical office space under construction across the Houston metro, the development pipeline remains highly active. However, there will likely be a significant reduction over the course of the year as several large projects are delivered.

Houston Methodist’s massive 1 million square foot tower in The Medical Center at 6551 Bertner St. is slated for completion this November. The $697 million tower will house 378 beds and will be 22 stories tall. Additional construction activity throughout the year will be focused on smaller facilities with negligible impact on the overall pipeline.

Despite some setbacks, overall demand in the sector remains healthy, fueled by a rapidly growing and aging population base. Healthcare networks will continue to look to increase market share by expanding services to where end-users reside, especially in growing-but-underserved suburban markets.

— By Stuart Showers, Director of Research, Transwestern Houston. This article first appeared in the May 2017 issue of Texas Real Estate Business Magazine.

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