San Antonio Medical Office Market Extends Growth Cycle

By Kim Gatley
Wednesday, November 9, 2016

“The San Antonio medical office market continues to extend its growth cycle,” says Kimberly Gatley, Senior Vice President and Director of Research for REOC San Antonio, a locally-based, full-service commercial real estate company.

Leasing activity and net absorption within the city’s 7-million-plus square feet of medical-only office lease space are accelerating at a moderate pace and rental rates continue to tick higher. Meanwhile, major hospital projects continue to expand area facilities. Methodist Healthcare System, for example, is expanding its South Texas Medical Center campus with a $250 million project that will add another 500,000 square feet, including a new seven-story tower to expand the Children’s Hospital. In the Far North Central sector, CHRISTUS Santa Rosa recently announced plans for the three-story, 60,000-square-foot Children’s Hospital of San Antonio Health Pavilion-Stone Oak, which will carry a price tag of $13 to $14 million.

“The ‘retailization’ of health care continues to steer some medical providers away from traditional medical-only office buildings and into shopping center locations in order to leverage visibility and convenience,” says real estate veteran and medical office market specialist Carl Bohn, Vice President of REOC San Antonio.

Although still high, the citywide vacancy rate within medical-only office buildings remained relatively stable in the first half of the year, largely due to the restrained pace of speculative development.

New construction has yet to deliver any new medical office buildings to the market through mid-year, but five new projects totaling nearly 200,000 square feet of new medical office space are expected to reach completion before the end of the year. Combined, the five buildings currently report a preleasing occupancy rate of 70 percent, which should allow vacancy to remain relatively stable upon the addition of the newly completed inventory.

Medical office rents, although somewhat slow to gain momentum to this point in the market cycle, reached a citywide average of $24.59 per square foot on an annual full-service basis at the end of the second quarter, which marks an increase of $0.54 compared to mid-year 2015, for a modest annual growth rate of 2.2 percent. Of course, top-tier Class A properties command a higher average of $28.09, which varies by location with averages ranging from $24.07 in the CBD to $31.76 in the Far North Central sector. (To adjust for buildings that quote rents on a triple net basis, operating expense figures have been added into the equation to arrive at an average equivalent full-service rate.)

“The solid fundamentals of both the San Antonio economy and medical office buildings, in general, continue to attract investor activity,” Gatley says. For example, Texas Healthcare Portfolio DST, an affiliate of Inland Real Estate Acquisitions, recently purchased four medical office buildings total nearly 73,000 square feet.

“The medical market is expected to continue its steady performance through the remainder of 2016 as healthcare-related job growth and demographic trends remain favorable. Barring any unforeseen shocks to the U.S. economy, the short-term outlook for the San Antonio medical office market remains clearly positive,” concludes Bohn. The long-term outlook, however, is not as certain because the local market is inextricably linked to the healthcare industry as a whole, which continues to evolve as it faces challenges and legislative changes.

Kim Gatley is Senior Vice President and Director of Research at REOC San Antonio, a locally based, full-service commercial real estate company. Contact Gatley at 210-524-4000 or