Medical market improves following a slow start

The Greater Phoenix medical office market rebounded in the second quarter. Positive net absorption was recorded while no new projects came online, causing the vacancy rate to inch lower. Vacancy is now at its lowest point in more than 10 years, with the most significant reductions being recorded in off-campus buildings. Construction has slowed thus far in 2018, following two straight years of deliveries that averaged approximately 100,000 square feet per year.

Investment trends for medical office properties were mixed during the second quarter. Activity picked up among traditional, multi-tenant medical office buildings, but slowed for condos. While sales velocity trends were uneven, pricing generally trended higher.

Cap rates have remained in the low- to mid-7 percent range for the past 18 months and with operating conditions healthy, the outlook calls for similar property yields through the end of this year.

Key Takeaways:

  • The Greater Phoenix medical office market gained some momentum during the second quarter. Net absorption picked up, providing the fuel for a 30 basis point decline in the vacancy rate.
  • Vacancy in medical office buildings dipped 30 basis points from the first quarter to the second quarter, reaching 14.2 percent at midyear. Medical office vacancy is down 170 basis points year over year.
  • The vacancy rate in off-campus buildings has fallen by 200 basis points in the past 12 months to 13.3 percent.
  • Rent growth in medical office buildings has been lackluster in recent years. Asking rents rose during the second quarter, reaching $23.34 per square foot, up just 1.4 percent from one year ago.
  • Sales of medical office buildings did not show much of a clear direction during the second quarter. Sales of condos slowed, but sales of larger, investor-owned buildings accelerated. Prices generally ticked higher and cap rates averaged in the low- to mid-7 percent range.

Outlook:

The forecast for the local medical office market remains largely favorable. The primary drivers of medical office demand remain firmly in place. The local population continues to add residents, through both the natural increases due to birthrate and in in-migration from other markets. The Phoenix area continues to attract residents, after in-migration slowed to next to zero several years ago.

The other source of demand for medical office space is employment growth, which has been particularly strong in the Phoenix metro area thus far in 2018. During the first half of this year, employers added more than 34,000 net new jobs in Greater Phoenix, including 4,000 positions in the healthcare field. Growth in healthcare-related fields is up more than 50 percent from gains recorded in the first half of last year.