A Tale of Two Office Markets: Phoenix Medical, Traditional Buildings Differ in Performance

Article originally posted on CoStar on May 9, 2024

Though challenges across multiple fronts have plagued the Phoenix office market for over four years, one segment of the sector has bucked the trend.

Property performance for medical office buildings, or MOBs, has strengthened since the onset of the pandemic, with vacancy declining from about 13.6% in the fourth quarter of 2019 to 11.1% in the first quarter of 2024. This is on pace with the level seen during the run-up to the Great Recession.

Nonmedical offices, meanwhile, have seen vacancy climb more than 650 basis points, with rates standing at a decade-high of 17.1%.

By the nature of their work, MOB tenants tend to rely more on their physical footprint than traditional office users. Health care providers such as primary care physicians, dentists, dialysis centers and medical labs, among others, often require specialized equipment and hands-on care that is difficult to replicate in a remote setting. As a result, MOBs have been less affected by alternative workplace arrangements, and their tenants have been comparatively “sticky” due to the cost and difficulty of relocating.

In addition, long-term demographic trends, including the aging of the U.S. population, point to increased demand for medical services in the coming years. Valley suburbs such as Sun CityParadise Valley and Scottsdale are popular retirement options, drawing older residents and strengthening underlying MOB demand.

Shifts in sales activity reflect the resilience of medical buildings.

In the five years before the pandemic’s outbreak, MOB sales accounted for about 15% of total office investment volume. That share climbed to 38% in the trailing 12-month period through the first quarter of this year.

For example, in March, a joint venture between TPG Angelo Gordon and Cypress West Realty Management paid $21.25 million, or $251.81 per square foot, for McDowell Mountain Medical. The more than 84,700-square-foot medical office property is located in North Scottsdale and was 97% leased at the time of sale to a mix of tenants, including cosmetic surgery providers, dentists and an occupational therapist.

BACK TO TOP FIVE