The strong population growth in Phoenix has been a driver of leasing activity and values across asset classes. Medical office is the latest beneficiary of the market's evolution. According to a recent report from CBRE, the medical office sector in Phoenix recorded a 260 basis point decline in vacancy rate to 14.7% from Q2 2017 to Q2 2018, and positive absorption was the highest among US metros. In addition to the strong absorption, rental rates also grew 4.8% in the market, well about the national average of 1.4% rental growth.

“This is happening in all of the new areas where people are moving. You are seeing tightness around the hospitals that have been there for a while,” Kate Morris, a broker with CBRE's healthcare services group in Phoenix, tells GlobeSt.com. “Now, those markets need to expand to meet the demand. It really comes down to who has insurance. In the areas where the income can support people that have insurance, that is where you are going to see the most growth.”

As a result of the strong demand, medical office users have moved into retail centers, and have been particularly interested in vacant boxes. “We had Fresh & Easy grocery stores that couldn't make it, and we have converted two of those into medical office use,” adds Morris. “We also have a 50,000-square-foot theater building that we converted into medical office, and it is already 90% full. The people that want to be in retail are pediatricians, primary care doctors and imaging.”