Colliers International in Greater Phoenix released its mid-year 2016 Medical Office Market Report for Greater Phoenix.

Vacancy of Medical Office space in Greater Phoenix dropped in the second quarter to 16 percent, which is 180 basis points below mid-year 2015. Vacancy in both on-campus and off-campus locations has declined during second quarter.

Net absorption of medical office space reached 112,300 square feet at mid-year with only 86,400 square feet of new space under construction.

Rental rates ticked higher during the second quarter, following a slight dip in the first three months. Increased demand and declining vacancy spurred the increases to an average asking rent of $22.80 per square foot, which is 2.5 percent higher than a year ago.

Investment activity pivoted during second quarter with an acceleration of sales in traditional buildings and a slowdown in sales of medical condos. This is the exact opposite trend of first quarter 2016. Prices for the first half of this year are up from 2015 levels. The median price for medical office condos dropped 4 percent this quarter to $167 per square foot. Traditional medical office buildings sold for a median price of $136 per square foot in second quarter.

The medical office real estate market has had a volatile recovery from the recession, but is now showing steady, healthy trends. Tenant demand is forecast to reach its highest annual total in nearly a decade and new construction is limited. Vacancy will continue to tighten as net absorption significantly outpaces the addition of new supply. Investment activity will remain strong as rents gain traction and escalate. Improving property fundamentals are taking place when cap rates for medical office buildings are providing a yield premium and interest rates are at record lows.