REOC San Antonio
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Kim_Gatley
Kim Gatley
S
enior Vice President & Director of Research at REOC San Antonio

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REOC San Antonio Releases 3Q16 Medical Office Market Update

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Source: REOC San Antonio/Xceligent

Extending the positive performance demonstrated in the first half of the year, the San Antonio medical office market registered positive gains in the third quarter to further its growth cycle. The stable local economy and expanding demographics continue to spur healthy leasing activity and demand for medical office space.
New leases and expansions generated 36,926 square feet of positive net absorption in the third quarter which boosted the year-to-date total to 67,574 square feet of total net gain. New development delivered two new buildings to the expand the medical-only office inventory to nearly 7.1 million square feet. Pre-leasing activity within the two newly-delivered buildings contributed to absorption gains this quarter. The two-story Dominion Crossing Medical Office Building (30,000 sf), for example, came online with University Health System (4,201 sf) and a pediatric dermatologist (5,523 sf) in place. Similarly, the three-story Christopher Medical Office Building at Grace Point (54,648 sf) opened with its anchor tenant, Sage Bariatric.
Leasing activity within existing medical office buildings seems to have plateaued. The citywide vacancy remained somewhat soft at 20.5% and nearly unchanged from the 20.1% registered last quarter – only slightly higher than 19.5% recorded in the same quarter last year. The relative stability is largely due to two main counter-balancing factors: (1) a lack of speculative development and (2) medical-related leasing activity migrating to non-medical properties.
On one hand, restrained development puts downward pressure on vacancy by forcing tenants to focus on filling existing space. But the lack of inventory, particularly that of smaller, stand-alone medical buildings ranging from 4,000 to 10,000 square feet or so, has created a challenge for physicians in need of such properties. At the same time, the “retail-ization of healthcare continues to steer some medical providers away from traditional medical-only office space and into conveniently located retail centers that offer visible signage and the synergy of consumer traffic. This works against absorption within the medical-only buildings and puts upward pressure on vacancy rates. The effect of these two conflicting forces has resulted in a stagnant vacancy rate for the local medical office market.
Rents, too, have remained relatively flat. In the third quarter, the average quoted citywide rental rate for medical office space climbed to $24.67 per square foot per year on a full-service basis which is up only $0.18 compared to the same quarter a year ago. Of course, top-tier Class A properties command a higher average of $28.15 but rents vary by location (To adjust for buildings which 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.)
Looking ahead, new product in the development pipeline includes the seven-story Live Oak Hills Medical Office Building (72,754 sf) located on the Methodist campus at 4458 Medical Drive in the South Texas Medical Center. In addition, the city continues to see an explosion of stand-alone urgent care or emergency hospitals such as the one recently completed at 7719 IH-35 South.
Although there is still much uncertainty on the healthcare front, the local medical office 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 outlook for the San Antonio market remains clearly positive.

Click to download REOC San Antonio’s complete 3Q 2016 Medical Office Market Report

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