Class A healthcare properties saw an 11.4 percent increase in leasing activity in the first quarter of 2023 compared to last year, while Class B properties saw a 44.4 percent decrease in leasing activity over the same period, according to a JLL medical office building report.
With economic headwinds that include high-interest rates and a continued war for talent, companies are making sure their real estate investments avoid too much risk. Business leaders in many industries want people back in the office to collaborate and innovate and are using quality properties to attract their employees back to the office. Healthcare is following suit.
Despite the less-than-booming economy, the medical office building market continues to grow with the population in North Texas. According to JLL’s data, DFW began 2023 with a positive net absorption of 162,912 square feet compared to the year prior, with the West Collin County submarket experiencing 132,700 square feet of absorption in the first quarter of 2023. That submarket accounted for nearly 40 percent of the total development pipeline for the region, with 176,074 square feet under development. Granbury and North Fort Worth also have more than 100,000 s.f. under construction.
Direct asking rent is on a slow incline after a Class A drop-off due to the pandemic. While the region averaged $21.81 per square foot in the medical office building space, the highest rents can be found in North Collin and Denton Counties and South Fort Worth, both clearing $28 per square foot. The cheapest rents can be found in South Dallas ($15.00 p.s.f), Hurst-Euless-Bedford (18.46 p.s.f.), and the I-20 corridor (18.51 p.s.f.). Vacancy has leveled off after a pre-pandemic at around 16 percent for the region. However, the range is from nearly 60 percent vacancy in medical office buildings in HEB to 2.3 percent in Greenville and Hunt County.
The Dallas-Fort Worth Medical Office building market is in a strong position for the future, most of which is tied to the increased growth of the region. JLL data says that DFW is forecast to grow 36.4 percent in outpatient real estate by 2030 compared to 14.9 percent nationwide. The population is expected to grow 13.8 percent in North Texas compared to 5.4 percent nationwide, and the 55-plus population is expected to grow 18.3 percent in DFW compared to 12.1 percent nationwide. North Texas also has 798 hospital beds per 100,000, compared to just 588 nationwide.
In uncertain economic times, business owners in all industries want quality real estate investments without risk, reflected in the dichotomy between Class A and Class B space. Companies focusing on ESG efforts could also be behind the shift, as Class A properties are more likely to meet environmental and emissions standards. When conditions are challenging, real estate investors and owners want a building they know will be successful.
Despite the drop-off for Class B properties, the direct asking rent hasn’t been negatively impacted, as the Class B rent increases over the past few years have mirrored Class A property rent increases. In fact, Class B’s direct asking rent is higher than Class A’s in the first quarter of this year, and the percent rent change compared to last year for Class B is 5.9 percent, compared to 1.3 percent rent increase in the previous year for Class A.
As usual, the diversity and resilience of the North Texas economy provide fertile ground for growth no matter what is happening in the economy elsewhere.
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