The Greater Phoenix Medical Office market has remained healthy during third quarter, despite an increase in sublease availability, according to a report from Colliers International. During the past three months, the market posted positive net absorption and a slight increase in rental rates, as well as maintaining vacancy below 15 percent. Continued population growth is expected to drive demand for healthcare and medical office space.
Approximately 87,913 square feet of positive net absorption took place during third quarter, marking the third consecutive quarter of positive net absorption this year. The Glendale submarket drove net absorption for the second consecutive quarter. That submarket’s delivery and move-in of akos at akos Medical Campus Phase I led the overall market in the third quarter.
Vacancy rose 30 basis points over-the quarter to finish September at 13.7 percent. Vacancy in medical office space has risen 100 basis points year-over-year. Sublease space increased 17 percent over-the-quarter and now accounts for 1.3 percent of the entire medical office inventory.
Rental rates increased 1.4 percent over-the-quarter and 3.8 percent year-over-year, finishing September at $21.90 per square foot. Rental rates have increased 19 of the past 20 quarters. Central Scottsdale posted the largest rental rate increase year-over-year, increasing 10.1 percent to $26.59 per square foot.
The Phoenix medical office market added 106,000 square feet of new properties during third quarter, which averaged 47 percent vacancy. These new building are primarily located in the Glendale and Deer Valley submarkets. Approximately 56 percent of projects under construction are pre-leased, which will bode well for the vacancy rate to remain healthy with these additions. Speculative development will be paused for a few months because developers are cautiously awaiting return of workers to offices for many tenants.
Investment sales volume increased dramatically 250 percent during third quarter but has decreased 15 percent over-the-year to $40 million. The largest deal of the quarter was the $27 million sale of Scottsdale Gateway I. The median price paid for medical office buildings increased 152 percent during third quarter to $160 per square foot. That price is below the five-year average of $189 per square foot. Cap rates remained low at less than eight percent. Medical Office Condo sales favored investors during third quarter. Sales volume increased 67 percent year-over-year and 29 percent over-the-quarter to $15,945,314. The median price per square foot for Medical Office Condos finished the quarter at $233, which is a 9.4 percent increase year-over-year. Approximately 61 percent of Medical Office Condo sales took place in the Scottsdale and Southeast Valley submarkets.
While leasing activity slowed during third quarter, it is expected to improve again to close the year and for the first portion of 2021. As population is anticipated to increase 1.5 percent annually, Phoenix has become a priority market. The Medical Office market will thrive as the population grows, motivating more development, leasing and investment sales.