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A Profitable Prescription: Spec Medical Office Buildings

Eric Johnson, national director for Transwestern’s Healthcare Advisory Services Group

Eric Johnson, national director for Transwestern’s Healthcare Advisory Services Group

KATY, Texas – The practice of building speculative medical office buildings — without tenants signed up in advance — was put on hold during the recession when both developers and lenders were looking to cut their risks.

But developers in certain markets around the nation  — Houston included — are breaking ground on new projects without having tenants lined up to occupy a big chunk of their new building.

One example is Katy Medical Plaza, Phase II, a 47,000-square-foot medical office building under development at Cobia Drive and Kingsland Boulevard in Katy by Friendswood-based Jacob White Construction Co.

Slated for completion in early 2016, the project broke ground in January 2015 without any tenants signed on. It’s currently 25 percent leased, with asking rents of $30 per square foot, NNN, according to Eric Johnson, national director of the Healthcare Advisory Services Group at Transwestern in Houston, which represents the developer.

Demand for medical space is so strong in this Houston submarket that the developer assumed the risks inherent in building on spec, Johnson said. “The medical office occupancy in this submarket surpassed 95 percent, and there was no additional supply under construction,” he said. “Several large hospital systems recently built new hospitals in the area and underestimated the demand for medical office space.”

Johnson said that building on spec allows a developer to capitalize on rising rents during the 15- to 18-month period it typically takes to construct a building in Houston.

“Developers are seeing rent growth within their own existing projects,” Johnson said. “They have existing buildings that are full, and they’re seeing prospects being turned away. The patients are here, so they’re making an educated guess that even with higher rents than other projects, they will still meet the current demand.”

By Robyn A. Friedman – Oct. 16, 2015

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