Vacancy hits lowest level in a decade

Phoenix, September 21, 2018 – Colliers International reports the Greater Phoenix medical office market gained momentum during second quarter, following a relatively lackluster first three months of 2018. Vacancy of medical office space fell to its lowest level in 10 years.

The medical office market rebounded with positive net absorption and no new projects completed during the quarter. This caused the vacancy to inch lower to 14.2 percent. Medical office vacancy is down 170 basis points since mid-year 2017. The vacancy rate in off-campus buildings has fallen 200 basis points in the past 12 months to 13.3 percent. 

Construction of new buildings has slowed in 2018, following two years of deliveries that averaged approximately 100,000 square feet per year.

Rental rates have been rather steady in recent years, rising an average of just 1.6 percent per year from 2015-2017. Asking rents rose during the second quarter, reaching $23.34 per square foot. This marks a meager 1.4 percent increase over the last 12 months. Asking rents in on-campus buildings remain lower than one year ago, averaging $25.42 per square foot. Off-campus medical building rents are on the rise, reaching $22.46 per square foot at the end of second quarter. Asking rents in off-campus buildings are 4.1 percent higher than a year ago. 

Sales of medical office buildings have not shown much direction during second quarter. Sales of condos slowed by 25 percent from first quarter. The bulk of medical office condo sales took place in the East Valley cities of Chandler and Gilbert, as well as West Valley cities of Glendale and Surprise. Year-to-date the median price for medical office condos is $218 per square foot. 

Sales of larger, investor-owned buildings accelerated. Sales in the first half of this year outpaced the same period in 2017 by 25 percent. Prices rose and cap rates averaged in the low- to mid-7 percent range. The median price in sales during second quarter was $190 per square foot. 

The forecast for the medical office market remains positive. Growing population and employment growth are driving medical real estate improvement. Employers added more than 34,000 net new jobs during the first half of this year, which includes 4,000 positions in the healthcare field.  Growth in healthcare-related fields is up more than 50 percent from gains posted during the first half of 2017. 

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Colliers International in Greater Phoenix has served clients locally and globally for more than 35 years.