Third Quarter Net Absorption in Medical Office Space Rebounds into Positive Territory
Phoenix, October 31, 2019 – The Greater Phoenix medical office space market performed well during third quarter, rebounding from a challenging performance during second quarter. Medical job growth hit 3.7 percent during the first three quarters of 2019, outpacing the 2.7 percent overall employment increase.
Net absorption of medical office space reached nearly 100,000 square feet during third quarter, outperforming the negative (152,827) square feet of net absorption posted in second quarter.
Developers have completed 211,582 square feet of new medical office space this year.
More than $1 billion of bioscience related projects are currently under construction with more than $2 billion set to launch of the next couple of years. These projects are expected to create nearly 7,000 new jobs once completed. Projects to watch include ASU/Wexford’s 227,000-square-foot medical lab/office space in Downtown Phoenix, Creighton University’s Medical School at Park Central and Mayo Clinic’s $600 million North Phoenix campus expansion.
Despite deliveries of new space, vacancy of medical office space fell approximately 30 basis points to 13.6 percent. Third quarter marked the eighth consecutive quarter of medical office space vacancies below 15 percent. The lowest vacancies are found in the Downtown North (2.7 percent) and I-10 West (4.0 percent) submarkets. Vacancy is expected to slightly rise during the last months of 2019 as more developments come online. However, increased absorption rates could counterbalance that new inventory addition.
Asking rental rates rose slightly during the third quarter with a 0.2 percent increase. Thus far in 2019, asking rental rates have risen 3.1 percent to $21.16 per square foot. The West I-10 submarket posted the largest increase over the year, elevating 20.3 percent to $23.06 per square foot. Second was South Tempe/Ahwatukee where rates increased 13.6 percent to $17.69 per square foot. Rental increases are expected to rise throughout the rest of the year at a moderate pace.
Year-to-date Greater Phoenix has posted its highest medical office investment sales volume since 2015. Thus far, volume has reached $238 million across 41 transactions. The median sales price has been $158 per square foot with cap rates settling at eight percent. During third quarter, sales volume rose 52 percent from second quarter levels to $111.6 million within 18 transactions. The median sales price during third quarter was $247 per square foot and cap rates were at seven percent.
The primary drivers of medical office space demand remain firm. Robust population and job growth are propelling the market in near to medium term.
About Colliers International
Colliers International (NASDAQ, TSX: CIGI) is a leading global real estate services and investment management company. With operations in 68 countries, our 14,000 enterprising people work collaboratively to provide expert advice and services to maximize the value of property for real estate occupiers, owners and investors. For more than 20 years, our experienced leadership team, owning more than 40% of our equity, have delivered industry-leading investment returns for shareholders. In 2018, corporate revenues were $2.8 billion ($3.3 billion including affiliates), with more than $26 billion of assets under management.