Phoenix Medical Office Absorption Leads Nation

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.”

Hospital expansion has been another driver of medical office activity, and as a result, there has been an expanding construction pipeline. New projects in Gilbert and Chandler are already preleased and will deliver this year. “The strong absorption has lead to new development and new product coming up,” Vince Femiano, first VP at CBRE, tells GlobeSt.com. “Our clients are outgrowing their current spaces. Because of rent growth, we can build spec medical office or reconverting retail. We are seeing that the rent growth is continuing to move forward and it is not impeding the new development deals. ”

In addition to Gilbert and Chandler, Goodyear has become another hot market for medical office. In addition to population growth there has also been job growth. “We are seeing more population growth because job creation in the office and industrial markets,” adds Femiano. “That, of course, leads to more housing and then medical and retail.”

As medical office users are moving into new facilities in these markets, older medical office space is becoming obsolete. “Older buildings that had small 1,000-square-foot doctor suites are becoming obsolete,” says Morris. “They are not going to be filling up with medical office again. They will have to become something else. At the condition they are right now, there are harder deals to fill.”