As cases of coronavirus and hospitalizations rose in Greater Phoenix following Memorial Day weekend, the area’s second quarter of medical office real estate market activity was also surging, according to a report from Colliers International in Arizona.  The medical office market posted its strongest quarter of net absorption in nearly two years and vacancy in this product type dropped 50 basis points.

During the second quarter of 2020, approximately 244,956 square feet of new medical office space was added to inventory and only 18 percent of that space is vacant.  This was the largest new supply of medical office space delivered since the third quarter 2017. 

The second quarter brought 192,001 square feet of net absorption.  Glendale experienced the strongest absorption with Valleywise Health taking occupancy of its 127,000-square-foot new building in that submarket. Other strong markets for leasing during the second quarter were Northwest Phoenix, Arrowhead, Gateway Airport/Loop 202 and Mesa East, 

Vacancy of medical office space decreased 50 basis points during the quarter to 13.8 percent.  The vacancy has risen year-over-year by 20 basis points. Approximately 642,157 square feet of new medical office projects are under construction, 53 percent of which is pre-leased.

Rental rates increased 0.7 percent during the second quarter and 4.3 percent year-over-year.  Average asking rental rates settled at $21.58 per square foot at the mid-year point.  Year-over-year rents have increased the most in Central Scottsdale and South Tempe/Ahwatukee submarkets, rising 8.9 and 6.8 percent respectively.

Investment sales volume of medical office buildings fell sharply during second quarter, decreasing to $11.6 million within just five transactions.  The median price per square foot also dropped to $106 per square foot.  A stronger number of small property transactions are taking place, rather than large ones. Office Condo investment sales volume decreased only 2.7 percent during second quarter to $13.5 million.  The median price per square foot for condo properties fell 7.4 percent to $217 during the second quarter.

The forecast for medical office space remains very positive for the remainder of the year.  The healthcare industry will be one of the fastest to rebound from the pandemic since it was not as adversely affected by the coronavirus as other businesses.  Also, Greater Phoenix continues its population growth, which increases the demand for healthcare services.  Asking rental rates are expected to softly increase next quarter.  Leasing and investment sales fell during the second quarter, but a number of paused deals are awaiting stabilization with the pandemic to get completed.  Tenants need to rebuild confidence before leasing, which will require people to return to work.  Investors are in the market looking for secure deals, but due diligence is requiring more time because both lenders and investors are requiring more certainty before moving forward.