Strong Medical Office Market in Phoenix Prepares for Robust 2021

Population Growth and Corporate In-migration Spur Demand for Healthcare

The medical office market in Greater Phoenix remains strong as population grows and companies relocate to the area.  Demand for healthcare is growing, which is projected to drive demand for medical office space throughout 2021.

During fourth quarter 2020, Ambulatory and the Health Care Service industry experienced job increases.  During October and November, the sector increased jobs by 2.12 and 3.01 percent respectively, as compared to the same months in 2019.  Maricopa County ranked #1 in Talent Attraction, according to EMSI’s 2020 Talent Attraction scorecard released in December. 

Net absorption of medical office space during fourth quarter reached 111,974 square feet, making every quarter in 2020 a positive net absorption timeframe.  During 2020, we posted a total of 485,566 square feet in net absorption.  Glendale had been leading the market in net absorption during second and third quarters but was surpassed during fourth quarter by the West I-10 submarket.  Central Scottsdale and Loop 303/Surprise also posted strong net absorption.  Demand for healthcare is expected to spur further leasing during 2021.

Vacancy of medical office space dropped to 13.2 percent at year-end, which is 50 basis points lower than year-end 2019 and 20 basis points lower than the end of third quarter.  Available sublease space declined by 16.0 percent over-the-quarter and is 32.2 percent higher than year-end 2019. The total amount of sublease space available in the market equates to less than 1.2 percent of the medical office inventory.  Central Scottsdale was hardest hit this past year with sublease space increasing 715 percent year-over-year.  Downtown North posted the lowest vacancy at the end of 2020 with just 2.3 percent available.

Rental rates remained strong during fourth quarter, increasing 1.2 percent since third quarter and rising 5.3 percent year-over-year to finish 2020 at $22.28 per square foot.  During the past four years, average rental rates have increased 2.61 percent per year. Southwest Phoenix posted the largest rent increases year-over-year, rising 16.8 percent to $24.50 at year-end.  Demand for space will continue pressuring rental rates up for the remainder of 2021. 

The medical office market added 26,541 square feet of new inventory during fourth quarter, which includes a 16,000-square-foot building in Glendale that is fully leased by BioLife Plasma Services.  The Glendale submarket led the market with most square footage added to inventory in 2020. Projects under construction are pre-leased at an amazing rate of 76.7 percent.  Expansion of the city will bring more construction of medical office space, especially in the West and Southeast valley areas.

Investment sales volume gained momentum during fourth quarter, increasing 45.2 percent over-the-quarter, but decreasing 8.5 percent over-the-year to $66.5 million.  The increase was driven heavily by the $21.2 million sale of Spectrum Medical Commons, a 43,355-square-foot property within the Gateway Airport/Loop 202 submarket. The median price per square foot increased 18.4 percent during fourth quarter to $174 per square foot.  This median price falls below the year-end 2019 figure by 21.1 percent.  Annual investment sales could not reach 2019 levels, primarily because of the low volume of sales in second and third quarters.  Sales decreased 49.8 percent year-over-year in 2020 to $191.8 million. Cap rates remain low at below eight percent. 

Phoenix is quickly moving up to become a top tier market, competing with larger cities for corporate headquarters and attracting more people in our labor force. As the vaccine rollout continues and life stabilizes, the metro area will continue expanding its economic and healthcare footprint.  

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