The Resilience in Phoenix's Medical Office Market

Phoenix’s medical office market remains healthy despite a temporary downturn in sales activity due to the COVID-19 outbreak.

The market added 244,956 square feet of inventory in the second quarter, with a vacancy of only 18 percent within those projects, according to a survey by Colliers International. That was the most new supply since 2017.

Net absorption was 192,001 square feet in second quarter. Colliers said that was the second consecutive quarter of positive net absorption and highest since Q4 2018. The Glendale submarket was one of the primary drivers of positive net absorption, led by Maricopa Integrated Health Systems’ move into its newly constructed 127,000-square-foot building.

The findings were consistent with a Colliers survey last week finding the Phoenix industrial real estate market remaining healthy despite the pandemic.

Investment sales volume for medical office buildings plunged more than 80 percent to only $11.6 million within just five transactions of more than $1 million and 10,000 square feet during second quarter. The median price per square foot dropped as well, to $106 per square foot.

But Colliers sees “a conglomerate of paused deals waiting to be completed” once conditions improve. “Investors are still in the market looking to secure deals, but the due diligence phase has significantly increased because both the lenders and investors require a high percentage of certainty to move forward,” the company says.

Rents increased 0.7 percent over the quarter and 4.3 percent year-over year. Colliers expects continued slight increases in the greater Phoenix area the next quarter. “However, the unknown coronavirus factors will significantly influence leasing activity. Until tenants are fully confident about returning to work, deals will be slow to complete.”

Overall, “The Medical Office forecast remains extremely positive for the tail end of 2020. Healthcare is expected to be one of the quickest industries to bounce back from the pandemic,” Colliers says.

The company says July 31 will be a crucial day for the commercial real estate market and the economy as a whole, as the government decides whether to extend the $600 supplemental unemployment benefits. “One would argue that an added benefit would hinder the economy because some employees are making more money not returning to work. On the other hand, if an employer cannot open their business, there is zero cash flow to pay employees. This unresolved policy question will be the primary focus in the weeks ahead.