Nonprofit Banner Health is investing nearly $400 million in expansion projects in the East Valley, including Banner Desert Medical Center in Mesa and Banner Gateway Medical Center (photo) in Gilbert.
Phoenix medical office market is fueled by population growth
The Greater Phoenix medical office building market is posting positive net absorption and rising rental rates as the city experiences nationally recognized population growth, according to a report released by Colliers in Arizona.
Positive net absorption of medical office space during second quarter totaled 206,449 square feet, recovering from first quarter’s negative net absorption and bringing the year-to-date net absorption to 173,331 square feet. Arrowhead posted the largest net absorption for the quarter with 111,656, followed by Glendale at 44,699 square feet. Approximately 47 percent more deals were signed during second quarter, marking a rise of 49 percent year-over-year.
Vacancy has declined as absorption picked up, falling 10 basis points during second quarter and 30 basis points year-over-year. The current vacancy rate is 13.1 percent across the metro area. The Airport Area submarket shows zero vacancy, while Downtown North posted the second lowest vacancy at 2.9 percent. Evaluating submarkets with more than a million square feet of medical office inventory, the Loop 303/Surprise submarket posted the largest decrease in year-over-year vacancy, falling 5.9 percent from mid-year 2020 to 10.2 percent.
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Rental rates are on the rise in the medical office building market, elevating to an average rate of $23.05 per square foot at the mid-year point. This marks a 6.1 percent elevation in rents year-over-year. West-I-10 posted the largest year-over-year increase in rental rates, rising 12.2 percent to $24.67 per square foot. Land prices have risen for new developments, which will result in further rental rate increases.
Construction of new projects has slowed to below the five-year average with only 231,000 square feet currently underway. The majority of current construction is situation in the Southeast and West Valley areas, who are benefiting from population growth. Two new buildings were completed during second quarter, totaling 150,500 square feet. Banner Health completed 128,000 square feet in the Arrowhead submarket and San Tan Medical was completed in the Gateway Airport/Loop 202 submarket.
Investment sales of Metro Phoenix medical office properties picked up during second quarter, with 15 transactions adding $66 million to the volume of sales completed this year. However, second quarter sales did not reach the historic price per square foot number that ws reached in the first quarter. As a result, the 2021 year-to-date average price per square foot fell to $195.45. Only one property sold for more than $300 per square foot during the quarter. Most of the traded properties were classified as B and C buildings built before 2005. CAP rates also are declining from 2020 levels, dropping 90 basis points to an average 6.7 percent.
Pro-business activity under the guidance of Governor Ducey has helped Greater Phoenix maintain a strong economy, fueling rapid growth in the business sector and population inmigration. These factors combine with expansion of universities and their alignment with cutting edge research to set the stage for further growth in the medical office market.