Phoenix Medical Office Vacancy Falls 33%

The medical office vacancy rate in Phoenix has fallen 33% in the past five years, according to a new report from JLL. The population growth in Phoenix has served as a catalyst for the medical office market, bringing the vacancy rate to 13.3% with average asking rents at $26.60 per square foot.

“The demand has increased as our population has increased, and our population is also aging,” Katie McIntyre, senior associate at JLL, tells GlobeSt.com. “So, there is a lot of growth in Phoenix in terms of population growth with a lot of new rooftops and households. That is where a lot of the new medical office developments are happening. We have really strong demographics in Arizona. Maricopa County has outpaced the nation in terms of population growth, and our retirement community has also contributed to people needing more health care.”

In addition to population growth, Phoenix has also attracted major healthcare providers in recent years. Mayo Clinic, Banner Health and Dignity Health, which is the largest hospital system in the US following its merger with CHI, all have a presence in the market. “Phoenix as a destination has a lot of really strong players, and there has been a lot of growth in recent years in attracting new significant players to Phoenix,” explains McIntyre. “Now, the market is seen as a healthcare destination.”

While the market is growing and expanding, absorption in the first quarter fell short with negative 69,697 square feet. However, McIntyre says that is typical for the sector. “Over the last three years, there is typically negative net absorption in the first quarter,” she says. “There is typically a ramp up throughout the year, and we end the fourth quarter with our highest net absorption. We expect that trend to continue this year.”

The Southwest Valley was the only Phoenix submarket with positive absorption in the first quarter, posting 26,723 square feet in absorption. “The Southwest Valley is growing because of the completion of the Loop 202 freeways,” explains McIntyre. “As the population grows there, we will need additional services to help treat those patients in that area. North Peoria is one of the fastest growing markets in Maricopa County, and that is why we are seeing a lot of demand in that area as well.”

Despite the weak performance in the first quarter, capital demand for medical office deals is strong. Investors see the potential and demand, and are fervently chasing opportunities, pushing cap rates into the 6% range. “Medical office is seen as a stable investment opportunity,” says McIntyre. 'There is a lot of interest in Phoenix, but there hasn't been a lot of opportunity. When core class-A assets do come to market, there is a lot of interest and it is compressing cap rates.”