Phoenix Medical Office Vacancy Hits 10-Year Low

The medical office market in Phoenix closed a strong second quarter after an anemic start to the year. According to new research from Colliers International, the medical office vacancy rate in Phoenix dropped to a 10-year low in the second quarter at 14.2%, down 170 basis points from mid-2017. Off-campus medical office product fell even more, down 200 basis points in the last 12 months to 13.3%. The Phoenix market in general has had a strong year across assets classes, and the growing population has driven activity in the medical office sector.

“We had a soft first quarter of the year, and it was nice to see a bounce back in the second quarter of the year,” Pete O’Neil, research director for Greater Phoenix at Colliers International, tells GlobeSt.com. “The drivers for medical office have been population growth and employment growth. That is because with population growth, more people need healthcare services, and with employment growth, more people have coverage.”

Despite the activity, medical office rents have stalled. From 2015 to 2017, rents have only increased 1.6%, and are up another 1.4% for the last 12 months. Off-campus medical office is once again leading the market, with rental rates up 4.1% in the last 12 months. O’Neil attributes the slow increase to the limited new construction activity. “We haven’t seen a lot of construction, and the new high-end construction is generally what pushes rents higher,” he says. “Medical office buildings also compete with for-sale options, so that puts a little bit of pressure on rents.” There are currently 100,000 square feet of new medical office in the Phoenix pipeline, mostly concentrated in Chandler, Gilbert and the West Valley. The activity in the second quarter could fuel more activity next year. “I imagine that we will see more medical office development, but it won’t be widespread,” says O’Neil.

The medical office market, in general, posts more stability than the general office market, which is more susceptible to economic fluctuations. At the moment, the medical office market is more active than the general office market. “Medical office is a lot more stable than the overall office market, and it is a lot more cyclical,” says O’Neil. “That is because there is a high demand for healthcare services. So, generally, I am not surprised when the medical office market posts more stable performance than the office market.”

While medical office is more stable, it also doesn’t see the surge in activity, like the general office market does. That makes the growth in the second quarter all the more impressive. “We are a popular market for business attraction, but on the healthcare side of things, you don’t really see big companies bringing in 1,000 or 500 new jobs for medical office,” says O’Neil. “You can see the big swings in the office market that you don’t see in the medical office market. Medical office tends to be recession proof, but since things are good, I expect the general office market to post more momentum.”