LaSalle Acquires Houston Trophy Tower

By Gail Kalinoski

Memorial Hermann Medical Plaza (Image courtesy of LaSalle Investment Management)

LaSalle Investment Management has acquired a 28-story, 510,000 square-foot, Class A+ medical office building in the Texas Medical Center district in Houston for a record-setting $405 million, reportedly the highest amount ever paid for a medical office property in the U.S. The sale of Memorial Hermann Medical Plaza establishes Houston as a top health-care real estate market in the U.S. and also continues the sector’s strength among commercial real estate investments.

LaSalle, which recently purchased Aviva Investors and Encore+, said it acquired the tower on behalf of its U.S. core open-end real estate fund, LaSalle Property Fund (LPF). The seller, which opened the property in 2007, was a partnership comprising Mischer Healthcare, Memorial Hermann Health System, and other private investors. The property at 6400 Fannin St. had become the subject of a 15-year, $117.5 million loan held by TIAA in late December 2006, according to Yardi Matrix. The loan was set to expire at the end of 2021.

Coy Davidson, senior vice president, Colliers International (Image courtesy of Colliers International)

“It’s very rare to see an asset like this trade hands,” Coy Davidson, senior vice president of the office & health care services group with Colliers International’s Houston office, told Commercial Property Executive. “It just doesn’t happen.” Davidson, who was not involved in the deal, said he was surprised when the news broke that the trophy property within the 2.1-square-mile TMC medical district—the world’s largest medical complex—had been sold and had done so at a record figure. “Medical office buildings are in short supply in terms of finding assets to buy. Everybody wants to own them right now. A lot of these publicly traded REITs, hedge funds and public equity funds are pouring tons of capital into health care real estate,” Davidson added. “To get one of this size is a rare event.”

Executive Managing Director Scott Galloway, Senior Managing Director Co-Head Colby Mueck and Senior Managing Director Rusty Tamlyn of HFF’s Capital Markets Advisors team in Houston represented the seller in the transaction.

“Memorial Hermann Medical Plaza represents a unique opportunity to acquire a trophy medical office building offering a stable, attractive income return and good prospects for long-term appreciation. This transaction directly aligns with our investment strategy of purchasing well-located core assets that offer stable cash flows and upside potential,” Jim Garvey, LPF portfolio manager, said in a prepared statement.

The property is 99 percent occupied and has Memorial Hermann Health System, one of the largest not-for-profit health care systems in Southeast Texas, as its anchor tenant. The building was designed to serve as Memorial Hermann’s integrated medical office tower for its flagship hospital campus and features hard-to-replicate infrastructure including an ambulatory surgery center, a linear accelerator and various imaging and diagnostic systems. It is located in the TMC medical complex, which is comprised of more than 60 member institutions, six major hospital campuses and more than 50 million square feet of health care, educational and research space. It is the eighth-largest business district in the U.S. and home to many of the world’s most prestigious health-care institutions.

“As one of the nation’s largest and most prominent medical office buildings, Memorial Hermann Medical Plaza is widely renowned for its best-in-class design, infrastructure, amenities and efficiencies,” David Schreiber, managing director of acquisitions at LaSalle, said in a prepared statement. “We are particularly attracted to the property’s complementary roster of prestigious medical office tenants and its exceptional location within one of the world’s most distinguished health-care clusters.”

MOB Sector Strong

Steve Bolen, managing director and U.S. sector head for medical office at LaSalle, noted that the firm has been one of the most active private equity investors in the MOB sector for the past 15 years. “We believe that the case for medical office investment is even more compelling today than it was in 2001 when we acquired our first medical office property,” Bolen said in prepared remarks.

Competition for health-care assets is projected to remain highly competitive this year with healthcare-focused private equity firms expected to continue making major acquisitions, according to Newmark Knight Frank’s 2018 Healthcare Outlook. The report noted that sales volume in the health-care market had been increasing for the past several years and hit a record in 2017 when $13.3 billion worth of medical office buildings changed hands.

Davidson said that he tracked 41 medical office building sales in Houston of properties larger than 10,000 square feet. Of those, at least five properties were sold by the Memorial Hermann Health System. Only one, the 458,569-square-foot George W. Strake Medical Building which sold to Medical Properties Trust, came close to the size of Memorial Hermann Medical Plaza.

He noted Houston, known mostly for its oil and gas industry, has a strong and growing health-care sector that has added to the city’s business diversity in recent years.

Asked what the record-breaking sale of the Memorial Hermann Medical Plaza means for Houston, Davidson said, “It will bring more attention to the city as a thriving health-care market.”