By Ben Reinberg, CEO, Alliance Consolidated Group of Cos.
In late September, Texas-based software company Dell became one of the latest major companies to announce a full return-to-office (RTO) mandate. In a leaked memo to employees, Bill Scannell, the company president, wrote, “As we enter a new AI world, in-person human interaction will be more important than ever.” Just a few weeks later, Amazon announced a full RTO policy. And over the summer, Meta, the parent company of Facebook, informed employees that remote team members would not be eligible for promotions.
These RTO announcements from major organizations have dotted the web for years following the pandemic, leading many investors to hope for a slow-but-steady march back to busy office buildings and revitalized downtowns throughout the Lone Star State. The actual data, however, tells a much different story.
Reports on Texas’ commercial real estate markets indicate that nearly a quarter of all office space is vacant nearly four years after the pandemic. According to CommercialEdge, Dallas’ office vacancy rate is 22.9 percent, and Austin’s is 27.8 percent. Workforce trends reflect a similar situation. Austin was named the No. 1 metro for remote workers in 2023 by Coworking Mag, with nearly a quarter of its workforce working from home.
With the RTO battle ongoing, investors and property owners are starting to feel the pressure mount. In Houston, empty offices cost property owners $1.56 billion in lost rental income, according to analysis conducted by Switch on Business of data compiled by Cushman & Wakefield. And according to data by CRE analytics firm Trepp, delinquency rates of office mortgages backing commercial mortgage-backed securities reached 9.4 percent in October — their highest levels since the global financial crisis of 2007 to 2009. Many office owners are looking to sell, but with property values sinking and the future uncertain, no one is buying — or renting.
While professional offices struggle, a different kind of RTO surge is opening up new investment opportunities in the Lone Star State — and it’s shaping up to be the next major market for the industry.
Medical Office Buildings: Everything Really Is Bigger in Texas
Since the implementation of the Affordable Care Act (ACA), the number of insured patients seeking healthcare has placed a growing strain on traditional hospitals. Many health systems began transitioning care to off-campus facilities to meet demand while managing costs.
These assets, known as medical office buildings (MOBs), are a unique asset class of commercial real estate designed to deliver non-emergency services ranging from routine blood work to minor surgery. As healthcare continues to advance and specialize, individual physicians and private practices have also become major contributors to the medical commercial building market. The result is a booming investment landscape filled with diverse tenants.
Individual healthcare practitioners have commonly purchased medical office buildings to house their own practices, as this strategy offers the dual benefit of real estate investment and control over the property. More recently though, larger institutional investors, including REITs, have begun acquiring medical office spaces to diversify their portfolios. This approach, often involving a predetermined leaseback strategy, lets healthcare professionals focus on patient care while avoiding the upfront costs of developing properties.
Unlike traditional offices, MOBs have proven resilient against nearly every major social, political and economic shift, including — perhaps unsurprisingly — the global pandemic. Medical office real estate growth is exceptionally healthy throughout Texas. Last year, Houston ranked No. 1 in total square feet for current construction and net absorption rates, according to data from Colliers. Other major metros like Dallas-Fort Worth and San Antonio echoed this trend, posting similar high-growth, low-vacancy dynamics.
Several factors are driving the rapid development of medical office buildings, foremost being the state’s rapid population growth. Texas is now the third fastest-growing state in the country, with 1.6 million transplants drawn to the lower cost of living and vibrant cities since 2020. With a growing population comes the increased need for healthcare infrastructure, spurring the development of millions of square feet in commercial medical space in 2023 alone. The population isn’t just growing, though — it’s also aging. By 2030, one in five Americans will be over the age of 65 and require more advanced and frequent healthcare services.
Unlike the many industries driving fluctuation in professional office properties, healthcare remains inherently hands-on and on-site. While telemedicine made significant strides during the pandemic, most quality medical care — imaging, physical exams, surgeries — will always require in-person care.
This reliable market demand, combined with the tendencies medical tenants to commit long-term to their spaces, makes net leases a popular option for medical office buildings. For investors, this structure offers reduced operational costs and less management responsibilities, as well as minimized risk. In addition, tenants can customize properties to their unique patient needs and update them freely as treatments and medical technology advance.
The bottom line is that the unique combination of strong tenant demand, customizable spaces and recession-resilient services has made MOBs a standout in commercial real estate for investors nationwide, especially in Texas. These properties yield some of the most reliable, consistent and highest annual returns of any commercial asset class. As properties that facilitate essential healthcare services, they represent one of the most stable, recession-resistant sectors available to investors, making them an attractive staple of any portfolio.
Investing in the Future of Texas
Investing in Texas’ medical office building network goes beyond returns, however. This asset class is pivotal in enhancing healthcare accessibility for our state’s growing population.
By decentralizing healthcare, or moving care away from hospitals and into communities, medical office buildings contribute to two key goals of healthcare equity. First, they make care more accessible, reducing travel time via “medtail,” or integrating offices into mixed-use commercial properties. For aging populations, people with disabilities and patients with busy schedules, convenient care really can improve patient outcomes.
Moreover, by increasing the availability of outpatient treatment options, MOBs pass on lower costs to patients while alleviating demand in overcrowded hospitals. This creates a unique opportunity for investors to make a meaningful impact while securing stable, long-term returns.
As Texas continues to grow, investing in medical office buildings is not just about capitalizing on a market trend; it’s also about supporting the well-being of communities and contributing to a healthier future for the Lone Star State.
Ben Reinberg, CEO of Alliance Consolidated Group of Cos., is a leader in commercial real estate investments who specializes in driving investments into medical, retail properties, offices and multifamily housing in major markets across the United States. The company is on the frontlines of making large purchasing transactions of commercial buildings with a portfolio value at more than $500 million.