The Greater Phoenix medical office market started out the year slow with negative net absorption of nearly 50,000 square feet in the first three months. Fundamentals in the market remain strong and a report by Colliers International in Greater Phoenix predicts improvement in upcoming months. To view the entire report, click HERE.
The negative net absorption experienced in the first three months of 2017 drove the vacancy rate up to 16 percent from 15.7 percent at year-end 2016. The bulk of the increase was recorded in the Arrowhead/Surprise submarket. Vacancy has been declining over the past several years and currently is 10 basis points lower than one year ago. Vacancy in on-campus buildings remained steady at 17.9 percent. The bulk of market inventory is found in off-campus medical properties and that vacancy rose for the first time in nearly two years.
Rents dropped slightly in the start of 2017, but gains have been registered over the past 12 months. Medical office rents have been slow to gain traction in this recovery, unlike traditional office properties.
Fewer medical office properties were sold in the first quarter of 2017 than in the fourth quarter of 2016. Sales of this category of property spiked more than 40 percent in 2016 and then lagged in the first portion of this year. The median price for medical office condos rose slightly in the first quarter, reaching $170 per square foot. Sales of traditional, non-condo medical office buildings fell nine percent from levels of the fourth quarter 2016. However, the first quarter of this year matched the volume recorded in first quarter 2016.
The uptick in vacancy follows seven consecutive years of vacancy declines. Tenant demand for space is forecast to remain strong, but the market is expected to see the largest amount of new construction since 2009. Projects being delivered are spec developments and the total new square footage will account for approximately 1.5 percent of the total medical office inventory. This will likely increase the vacancy. More than new construction, the biggest source of uncertainty in the medical office market is the ongoing healthcare debate. In the upcoming months, owners and developers of medical office properties will be keenly watching the results of any legislative activity.