Lease Rates Drop, Vacancy Steady in Medical Office Buildings

GPE Commercial Advisors released its 3Q healthcare report for the Phoenix Metro.

At the end of the 3Q 2013, the government had shut down and the debate over the debt ceiling was at an impasse over the funding of the Affordable Care Act (ACA). Not only are healthcare providers trying to understand the impact ACA will have on their practice, the government is at a standstill trying to understand its implementation and long-term effects and trying to implement it efficiently, starting with using exchanges to shop for health insurance. As a result, the effect the ACA will have on healthcare investment real estate continues to remain unknown. As the statistics in the Phoenix market prove to show little change since last quarter, nationally, the medical office/investment sales have been strong.

The average lease rate dropped slightly in the 3Q to $21.79, full service from $21.92 in the 2Q, according to CoStar.  The vacancy continues to hover at +/-30%.  The above data is comprised from 325 medical office buildings consisting of 10,000 SF or more, for a total of 12,995,709 SF.

Medical Office Sales Activity

In the 3Q 2013, there were 29 medical office sales transactions comprising of bulk portfolio sales, multi-tenant and owner/users. While the bank-owned properties are drying up, there still continues to be deals in the market. The total sales volume was $95,533,190, with the average price per square foot of $204.80 and an average cap rate of 8.33%.

Montecito Medical Investment Company sold six properties to CNL Healthcare Properties for $59.5M, which is $327 a SF. Three of the six properties were John C. Lincoln Medical Plaza I, John C. Lincoln Medical Plaza II and the North Mountain Medical Plaza with a combined total of 73,666 SF and are well-leased to multiple tenants, including John C. Lincoln/Scottsdale Health. The John J. Lincoln Health Network, which occupies about 45% of the buildings, has recently formed a strategic alliance with the Scottsdale Health System.

On October 1, Tenet Healthcare completed its acquisition of Vanguard Health System, Inc. (“Vanguard”). Vanguard operates as Abrazo Health Care in Phoenix. The transaction brings Tenet back to the Phoenix market after selling its former hospital assets to Iasis Healthcare in 1999.

Senior Housing Supplement

The senior housing real estate market includes assisted living, independent living, skilled nursing and dementia/memory care facilities. In the Third Quarter 2013, there were two transactions for a total of $4.285M: Reflection Bay at 2932-2942 N. 14th Street in Phoenix sold for $3.325M, just below an 11% cap rate at $109 per SF with a tenant in place; Fiesta Village Supervisory Care at 5602 N. 7th Street sold for $960,000, which is +/-$52.00 a SF.

The former Kindred Care facility at 11250 N. 92nd Street in Scottsdale is being converted to a 42 unit memory care facility. This new project, Amber Creek Memory Care, is expected to be completed at the end of 2014.


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