Texas Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in Texas.
Issue link: https://texasrealestatebusiness.epubxp.com/i/817755
32 • May 2017 • Texas Real Estate Business www.REBusinessOnline.com T he Houston healthcare sector has gotten off to a slow start in 2017. Financial concerns are impact- ing several healthcare systems as they adapt to a changing marketplace. Industry challenges such as increas- ing technology costs, as well as chang- es in payer mixes and reimbursement rates, have impacted organizations' operating models as a whole. While the majority of organizations have ef- fectively 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 an- nounced 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 an- nounced 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. Adeptus Health, a freestanding emergency room operator with more than 29 Houston-area locations, ap- pears 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 insur- ance and Adeptus struggled to collect fees directly from patients. Finally, the quarter's largest nega- tive 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 hospi- tal 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 an- nounced that it will begin construc- tion on a 210,000-square-foot build- ing situated on 19 acres in Rosenberg, Texas. TexPharma plans to consoli- date operations nationwide into the Rosenberg Business Park. The facility will initially house 80 employees and could grow to 500. On the leasing side, continued de- mand 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 contin- ue to suggest that the Houston health- care sector is positioned for long-term growth, with 8,300 jobs created dur- ing the 12 months ending February 2017. However, a look at the first two months of 2017 show losses in the sec- tor to the tune of 1,900 jobs, occurring primarily in ambulatory and health- care services. Considering the recent layoffs announced by CHI St. Luke's, the short-term prognosis is for mini- mal 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 Hous- ton 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 mil- lion 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 con- struction activity throughout the year will be focused on smaller facilities with negligible impact on the overall pipeline. Despite some setbacks, overall de- mand in the sector remains healthy, fueled by a rapidly growing and ag- ing population base. Healthcare net- works will continue to look to increase market share by expanding services to where end-users reside, especially in growing-but-underserved suburban markets. Stuart Showers is the director of research for Houston at commercial real estate firm Transwestern. HEALTHCARE HITS SPEED BUMPS IN HOUSTON AS DEMAND REMAINS STRONG Systems struggle to adapt financially to industry changes, but fundamentals are solid. By Stuart Showers Come Visit Us ICSC RECon 2017 S255Q 26 th Avenue, South Upper Hall Fort Worth Ellis County Dan Avnery President, Dallas Retail 214.256.7144 [Dallas Office] Monica Greer Transaction Manager 214.256.7151 [Dallas Office] Cameron Haddad Market Director 817.872.3906 [Fort Worth Office] Hunter Hayes Market Director 817.872.3911 [Fort Worth Office] Ryan Lee Market Director 214.256.7143 [Dallas Office] Jon T. McDaniel President, Ft. Worth Retail 817.872.3902 [Fort Worth Office] Basil Mitchell Market Director 214.256.7154 [Dallas Office] Bobby Montgomery Market Director 817.872.3908 [Fort Worth Office] Tom Heraty Partner, Dallas Retail 214.256.7175 [Dallas & Ellis County] Stewart Korte Market Director 214.256.7152 [Dallas Office] Kornel Romada Executive Vice President 817.872.3904 [Fort Worth Office] Andrew Shaw Market Director 214.256.7104 [Dallas Office] Josh Parks Analyst 214.727.5487 [Dallas Office] Dallas Vicki Parker Market Director 214.256.7146 [Dallas & Ellis County] Retail Property Listings in DFW 375 + 1200 Summit Ave. Suite 800 Fort Worth, TX 76102 817.885.8333 4851 LBJ Freeway 10 th Floor Dallas, TX 75244 214.256.7100 229 S. 9th Street Midlothian, TX 76065 214.256.7100 BUILDING SUBMARKET SF EXPECTED DELIVERY Memorial Hermann Northeast Northeast 123,000 February 2019 Memorial Hermann Texas Medical Center Texas Medical Center 1,340,000 March 2019 Memorial Hermann The Woodlands The Woodlands 34,000 September 2017 Houston Methodist Texas Medical Center 1,000,000 December 2017 Houston Methodist at The Woodlands The Woodlands 470,000 July 2017 Houston Methodist West Campus Far West 228,700 July 2018 Houston Methodist at Sugar Land Sugar Land 138,000 July 2018 Baylor St. Luke's Medical Center McNair Campus Texas Medical Center 100,000 March 2019 Baylor St. Luke's Medical Center McNair Campus Texas Medical Center 900,000 March 2019 Texas Children's West Campus Far West 75,000 June 2017 University of Texas MD Anderson Cancer Center Texas Medical Center 185,000 January 2018 Bay Area Regional Medical Center Clear Lake 100,000 May 2017 Ben Taub General Hospital Texas Medical Center 140,000 March 2018 Houston VA Medical Center Texas Medical Center 140,100 September 2017 Total 4,973,800 Source: Revista, Transwestern Notable Hospitals Under Construction