Consolidations of Medical Practices Make Pre-2000 Buildings Obsolete

Phoenix, Arizona – Colliers International in Greater Phoenix released its third quarter 2016 Medical Office Market Report for Greater Phoenix.  The report indicates that older medical office buildings are no longer optimally functional and have put a drag on the market.  Report highlights are outlined below.  For more details, refer to the attached report or click Here to view online.

• Vacancy of Medical Office space in Greater Phoenix dropped slightly in the third quarter.  The vacancy has improved 120 basis points in the past 12 months.  The majority of improvement has been seen in off-campus properties
• Net absorption of medical office space was positive, but just 58,000 square feet in the past three months.  This is the lowest quarter for net absorption in more than a year.
• Rental rates ticked slightly higher during the third quarter, but improvement was modest and focused in off-campus buildings.  The easing pace of tenant demand is slowing the rate of rental rates.
• Investment activity during third activity showed improvements in condo building sales and a slowdown in sales of traditional medical buildings.  Quarterly pricing trends were uneven, but 2016 prices are still higher than in 2015.

One reason for slowing vacancy improvement is that older space constructed prior to 2000 was designed for smaller, private practices.  Since the Affordable Care Act was implemented, we have seen practice consolidations that require larger suites.  Smaller spaces in older buildings are proving difficult to lease, leading to higher vacancies in these buildings.  The vacancy rate in buildings constructed before 2000 is nearly twice as high as those built during this millennium.

The Greater Phoenix medical office market will continue to benefit from growing population and an expanding labor market.  Net absorption has been positive as a result of tenant growth.  Demand is picking up well in suburban markets such as the East Valley and West Valley, which has spurred new development.  The recent election has increased uncertainty about the future of healthcare, but traditional local drivers of medical office demand should remain in place.

Colliers International Releases 4Q 2015 Medical Office Market Report for Greater Phoenix

Phoenix, AZ – Colliers International in Greater Phoenix released its fourth quarter 2015 Medical Office Market Report. Report highlights are outlined below. For more details, refer to the attached report or click here to view online.

The Greater Phoenix medical office market strengthened in 2015, particularly in the second half of the year. Vacancy ended the year below 17 percent, the lowest figure since mid-2008. Local vacancy is expected to continue this gradual pace of improvement, even as a few new development projects come onboard.

Part of the improvement in the local medical office market is being driven by a strong pace of employment growth in the healthcare sector. More than 9,000 jobs were added in this segment of the local economy in 2015, representing growth of more than 4 percent.

Key Takeaways

• Medical office vacancy in Greater Phoenix improved in 2015, falling 100 basis points to 16.9 percent, marking the sixth straight calendar year where medical office vacancy improved.
• With vacancy tightening, asking rents have begun to push higher. Average asking rents ticked higher in both on-campus and off-campus buildings.
• Sales for medical office buildings were mixed. Sales of medical office condos slowed, but activity gained momentum in non-condo, traditional medical office properties.
• The median price in condos sold during the fourth quarter was $166 per square foot, 12 percent higher than during the third quarter. In 2015, the median price spiked 26 percent from 2014 to $159 per square foot.

Sales velocity for non-condo medical office buildings surged 39 percent higher than levels recorded in 2014. The median price in sales of traditional medical office buildings was $118 per square foot in the fourth quarter, 11 percent lower than the third quarter figure. For the full year, the median price inched up 3 percent to $126 per square foot.

Outlook:
The forecast for the Greater Phoenix medical office market is favorable for 2016, as demand will be spurred by both employment growth and population expansion. Early estimates call for population growth of more than 2 percent in 2016 and job growth topping 3 percent. These gains will translate directly into greater demand for healthcare services, which will fuel tenant demand for medical office space.

The investment outlook for medical office properties is brightening, as property fundamentals have stabilized and are beginning to improve. The greatest rise in activity has been in the midsize multi-tenant buildings ranging from 10,000-25,000 square feet. Collectively, these transactions, which typically feature between 5 and 10 tenants, accounted for nearly 60 percent of the total activity in 2015.

To read full report click here.

According to Colliers International, expect the industrial market to stabilize over the second half of this year.

Industrial vacancy in Greater Phoenix ticked up 10 basis points in the second quarter, reaching 12.1 percent. The rate has dipped 20 basis points from one year ago, and has remained in a fairly tight band over the past two-plus years.

Net absorption totaled 523,000-square-feet in the second quarter, compared to approximately 1.5 million-square-feet in the first quarter. Net absorption has averaged 1.4 million-square-feet per quarter since 2010.

Projects totaling nearly 1.3 million-square-feet were delivered in the second quarter, after more than 1.7 million-square-feet came online in the first three months of the year. Deliveries will slow in the second half of the year, however, eliminating some of the supply-side pressures in the market.

Sales of industrial buildings spiked in the second quarter, following light activity in the first three months of 2015. Despite the volatility, sales velocity is off just 9 percent from the first half of 2014.

The median price in industrial sales to date is $72 per square foot, 9 percent higher than the 2014 median price. Approximately 20 percent of the buildings sold during the second quarter traded at prices above $100 per square foot.

For full report click here: Greater Phoenix Industrial Report_2Q 2015