Net absorption strengthens and rental rates rise in metro area
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 square feet, 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 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.
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 slowed to below the five-year average with only 231,000 square feet currently underway. The majority of current construction benefiting from population growth is situated in the Southeast and West Valley areas. 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 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 was 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 of 6.7 percent.
Pro-business activity under the guidance of Governor Ducey helped Greater Phoenix maintain a strong economy, fueling rapid growth in the business sector and population immigration. An additional factor is the expansion of universities combined with their alignment with cutting edge research to set the stage for further growth in the medical office market.
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