Vacancy Remains Low Despite Additions to Inventory
Phoenix, Arizona – The Greater Phoenix Medical Office real estate market continues to thrive, largely driven by job growth in the health services sector. Developers have been adding new space to the market, but demand has kept vacancy low.
Three of the Valley’s cities ranked in the top ten “Best Cities for Jobs,” according to WalletHub. Ten of the 11 major sectors added jobs in 2019, with the largest gains experienced in Education and Health Services.
Vacancy of medical office space remains below 15 percent, continuing a steady downward trend since third quarter 2012. The West I-10 submarket posted the lowest vacancy in fourth quarter 2019, with just 4.0 percent. Downtown North had the second-lowest vacancy, ending the year at 9.7 percent. The vacancy rate is expected to increase slightly this year as more projects come online. Projects currently under construction are 48 percent leased.
Asking rental rates fell by 0.6 percent during the fourth quarter yet increased 2.3 percent during the entirety of 2019. Current asking rates average $20.99 per square foot. The largest increase took place in the West I-10 submarket, where average asking rents rose 13.8 percent to $23.19 per square foot. The Camelback Corridor submarket posted the second-largest increase in rates, rising 9.9 percent to $23.56 per square foot. Rental rates are expected to increase further for the remainder of 2020.
The number of buildings sold during 2019 increased during fourth quarter 2019, as did the sales volume. Building transactions were up nine percent in 2019, totaling 56 for the year. The number of buildings sold increased 15 percent in fourth quarter from the previous three months. Sales volume increased in 2019 by 35 percent to $305 million. This is the highest sales volume posted since 2015. The median sales price in fourth quarter was $204 per square foot, up 29 percent from third quarter’s average of $158 per square foot.
The forecast for Greater Phoenix’ medical office market remains favorable. Robust population and job growth are expected to propel the medical office market in the near to medium terms. More than $1 billion of bioscience-related projects are currently under construction. Another $2 billion are set to launch in the next few years. We are expected to add nearly 7,000 new jobs for these projects as they are completed. Significant developments to watch include ASU/Wexford’s 227,000-square-foot medical lab/office space in Downtown Phoenix’s Biomedical Corridor. Additionally, we will see the evolution of Creighton University’s Medical School at Park Central and Mayo Clinic’s $600 million North Phoenix campus expansion.
The largest variable impacting our medical office market will be economic impact of the current coronavirus crisis. As the worldwide event unfolds, we will see how markets turn, federal rates change, and funding sources are altered.