Pandemic Fuels Phoenix Medical Office Absorption

The Phoenix medical office market experienced a surge in absorption during the second quarter as coronavirus cases increased in the region. As a result, the asset class has managed to outperform expectations during the pandemic with 192,001 square feet of net absorption led by Maricopa Integrated Health Systems, according to research from Colliers International. The vacancy rate also fell slightly to 13.8%.

“Medical office added 244,956 square feet of inventory in the second quarter, with a vacancy rate of only 18%. This was the highest about of inventory delivery in the past 10 quarters,” Phil Hernandez, regional manager at Colliers International, tells GlobeSt.com. “This was primarily led by Maricopa Integrated Health System taking occupancy of their recently completed 127,000 square foot building in Glendale.”

In addition to the strong leasing activity, rental rates also increased .7% during the second quarter and 4.3% year-over-year. At the mid-year, asking rents averaged $21.58 in the market. “Phoenix continues to be a very tight market with vacancy remaining below 15%, this creates strong competition for available space. Adding new quality space to the inventory sets a higher competitive market increasing rents,” says Hernandez.

While leasing activity was strong, investment activity slowed significantly. There were only five transactions in the second quarter, totaling $11.6 million at a median price of $106 per square foot. The decline in investment demand was also driven by the pandemic. “The disruption of the pandemic brought so much uncertainty to not only the medial office market but to all product types,” says Hernandez. “It took time to understand what effects the commercial real estate market would have from the pandemic. As confidence continues to increase sales activity will follow closely.”

Medical office activity declined in the first quarter before making a second quarter comeback. The market is expected to continue to perform during the pandemic through the end of the year. “If the first quarter were not interrupted by canceling all nonessential medical procedures the medical office market would have only witnessed a small interruption from the pandemic, however this major set back has delayed leasing activity by bringing uncertainty to independent medical offices until third and fourth quarter,” says Hernandez. “We have started to see activity pick back up and are very optimistic for the remainder of the year.”