Q2 Medical Office Market
- Not only does Greater Phoenix continue to lead the country in job creation, it also remains #1 for population growth (three years running).
- During the 12-month period ending in May, preliminary estimates show that employers added 66,500 net new jobs, an increase of 3.2 percent which places Greater Phoenix #1 in overall job growth for the country.
- In general, the Greater Phoenix Medical Office Building (MOB) market performed well during the second quarter despite a few hiccups.
- Net absorption turned negative, which at (152,827) square feet was the largest contraction since 1Q 2014’s (153,419) negative absorption amount.
- Nonetheless, employers continue to add workers at a very active pace with healthcare employment rising 4.2 percent over-the-year, beating the overall employment market increase of 3.2 percent.
- During the 1H 2019, 131,852 square feet was delivered to the market, which combined with negative absorption, saw vacancy edge 40 basis points (bps) higher to end the quarter at 14.1 percent. Despite vacancy’s near-term increase, as of the end of 2Q marks the 7th consecutive quarter with vacancy rates below 15 percent.
- Asking rents witnessed a mild (0.2) percent contraction over-the-quarter but rose 4.2 percent over-the-year to end at $21.07 per square foot.
- Investment sales volume increased over-the-quarter by 52 percent to $111.6 million across 18 transactions. The median sales price per square foot increased to $247, with cap rates resting at 7 percent.
OUTLOOK: The forecast for the local medical office market remains largely favorable. Although net absorption was negative for the quarter it is by no means a trend. The primary drivers of medical office demand remain firmly in place. Given robust population and job growth should continue to propel the MOB market in both the near-to-medium terms.
Markets remained robust for most of the second quarter and the drag on real estate prices many were expecting, as a result of rising rates, has not materialized. With a more dovish Fed, and more talk of QE 4 (Quantitative Easing), expect elevated demand for commercial real estate assets to continue, especially as yields continue to plummet (particularly across fixed income instruments a la Treasury notes) and as investor need for cash flowing vehicles, due in large part to changing demographics, continues to rise.