
By Nelson Udstuen, President, Healthcare Division
Quality medical office space sits at the center of every growth plan, relocation, and renewal. Houston presents plenty of square footage on paper, yet only a narrow share fits the locations and formats healthcare practices rely on for patient access and long-term stability.
Houston’s growth continues to push demand higher. Practices see strong patient volumes and steady expansion; however, the real estate side has not kept pace. Securing the right space now requires earlier planning, broader search criteria, and a clearer understanding of the financial pressures shaping the market.
Let’s explore the forces driving today’s healthcare real estate environment.
1. Market Conditions
The shortage is quality space, not total space
Houston has roughly 30 million square feet of medical office space. On paper, occupancy stays in the 80% range. That number does not reflect the true shortage. The pressure sits on quality assets where providers want to practice.
Quality means:
- An appealing building that supports patient experience.
- Easy access for a growing patient base.
- A location that aligns with referral patterns.
- A tenant mix that supports clinical synergy.
Those locations are limited and have an average occupancy rate of over 90%.
Supply tightened after the last construction cycle
From 2021 through 2023, the market saw about 1 million square feet of new Class A medical office construction starts. By late 2023, the pipeline slowed. By early 2024, virtually no new multi-tenant Class A projects were breaking ground.
For almost two years, the Houston market has added little new supply in the category that matters most to private practices. The result is a tighter field of options, especially for groups that want to stay off hospital campuses.
2. Cost Pressures
Rent and build-out costs rise faster than practice revenue
Many quality medical office buildings are owned by publicly traded healthcare REITs, private equity firms, or investment groups that focus on medical assets. These groups hold a large share of the highest-quality buildings and must meet strict return targets. Year-over-year rent growth plays a key role in those returns. Traditional office markets sometimes reset with lower rents. Healthcare rents rarely move downward.
Construction costs tell a similar story. Build-out pricing surged after COVID and never retreated. Medical space remains expensive to convert even with generous construction improvement allowances from landlords.
Reimbursement pressure widens the gap
Large payers hold strong control over reimbursement in Texas. In 2022, three private insurers controlled about 80% of the Texas payer market. That concentration influences reimbursement rates across the board.
A procedure that reimbursed $1000 a few years ago might reimburse closer to $850 today. Hospitals feel it. Private practices feel it. Couple that with higher staffing, equipment, and supply costs, and the margin between declining practice revenue and increasing occupancy costs grows wider each year.
3. Quality and Suitability
Challenges beyond price
Price is only part of the equation. Several structural factors affect the search for suitable medical space.
On-campus buildings
Hospitals decide which practices they allow on their campuses. They may decline a specialty if they believe they already have enough of that service. Also, many hospitals require tenants to hold hospital privileges that some providers do not wish to carry. That leaves some providers with no path to a preferred campus location.
Off-campus unrestricted buildings
These assets often sit near full occupancy. Available suites tend to be small or irregularly configured. If the square footage does not match requirements, the option disappears.
Second-generation medical space
This is the most desirable category. It is also the scarcest. Second-generation spaces are easier to occupy and more cost-effective. When one becomes available, it moves fast. Shell space is more common but more expensive to build.
Locations and property types that are hardest to secure
Two categories consistently rank as the most competitive:
1. Class A unrestricted buildings with second-generation space
These are top choices for most practices. They offer modern systems, flexibility on clinical use, and strong patient access. Demand exceeds supply.
2. Retail centers
Healthcare has been moving into retail for years. Providers value visibility, surface parking, and community access. Retail owners understand this and manage exclusives accordingly.
A 100,000-square-foot center might allow one primary care group and then lock out all other primary care uses for the life of the lease. A hospital system or national group can take that slot quickly. When that happens, other groups lose any chance of entering that center for years.
4. Strategy and Solutions
Start 24 months ahead
The familiar 12-month timeline no longer works. A realistic window is 24 months. That timeline provides enough room to:
- Run a full survey of all quality assets, including off-market.
- Track upcoming second-generation opportunities.
- Model rent and construction costs.
- Negotiate without urgency driving the decision.
- Maintain negotiating leverage with existing landlord.
Without that time, options shrink. A practice might end up with one or two workable choices, neither matching preferred location or layout.
Stay flexible
Some practices assume medical office is the only acceptable setting. Others assume retail is the only setting that fits their patient base. The market often rewards those who are willing to evaluate both.
Examples include:
- Long-standing medical office users exploring retail to improve patient access.
- Retail users moving into medical office once the patient base is strong enough that signage matters less.
Flexibility widens the playing field and opens paths that were not obvious at the beginning of the search.
Prepare for higher rent and higher capital needs
Two points guide most new leases and renewals today.
Increase the rent budget
Per square foot rents will be higher than most current lease rates. Some practices reduce square footage to keep total occupancy costs stable. Efficiency becomes important.
Prepare capital for build-out
Few landlords offer full turnkey build-outs. Practices often cover a significant portion of the construction cost. In some cases, that contribution can exceed $75-$100 per square foot.
Groups without a capital plan risk losing the right space at the right time. Cash reserves or financing should be ready early in the process.
5. Looking Ahead
Tight conditions will continue
New Class A medical office projects face high pre-leasing thresholds. Many require around 50% pre-leasing before construction begins. Starting rents for proposed projects sit in the mid 30s to low 40s on a net basis, which represents the highest range seen in Houston.
Those rents are difficult for many practices to absorb. As a result, projects stall. The market now sits roughly 1 million square feet behind where it should be in multi-tenant medical development that serves private practices.
These conditions are likely to persist through at least the end of 2026.
Houston remains one of the strongest healthcare markets
Houston remains one of the strongest environments in the country for healthcare growth. Population trends support long term demand, and private practices continue to build large and stable patient bases. The real constraint is the real estate supply chain.
Providers who plan ahead, stay flexible on location and building type, and prepare for the financial realities of construction and rent trends are in the best position to secure space that supports their operational goals.
For groups evaluating expansion, relocation, renewal, consolidation, or purchase, early planning creates the strongest advantage.
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