Wary Office Investors Gravitate to Phoenix’s Medical Buildings

Article originally posted on CoStar on June 14, 2023

Though office sales in the Phoenix market have slowed considerably, one segment has remained relatively resilient: medical office buildings.

Medical office buildings, or MOBs, are purpose-built commercial buildings specifically developed for healthcare providers and professionals. They often include patient waiting rooms, exam rooms or other specialized systems related to medical services. MOB users are often office-based outpatient medical practices and clinics, typically housing primary care physicians, dentists, specialists and imaging centers.

Sales activity for traditional office properties is down more than 30% from 2019 levels, while MOB sales are down just 14%. As a result, MOB’s share of the total Phoenix annual office transaction volume has climbed from about 31% in 2015 to nearly 38% in the first quarter of 2023. That is the largest share of office transaction volume for the sector in over a decade.

A MOB sale from earlier this year also set a new record in the market. In February, Austin, Texas-based Virtus Real Estate Capital acquired a new 70,000-square-foot medical office building at The Grove development in Phoenix for $693 per square foot. That is the highest price-per-square-foot figure on record among properties over 5,000 square feet. The $48.5 million property is in the Camelback Corridor area, near the Arcadia neighborhood, and is fully occupied by Banner Health on a 10-year lease.

The underlying demand for medical office space is more resistant to remote work trends. Though online health service models are becoming more popular, remote work associated with MOBs is limited. Healthcare services, by nature, have unique requirements that often necessitate in-person interaction and specialized infrastructure that cannot be easily replicated digitally.

Additionally, long-term demographic trends, like the aging of the baby boomer population, provide a steady tailwind for medical care. The World Health Organization estimates that from 2015 to 2050, the proportion of the global population over 60 years old will nearly double from 12% to 22%. Overall population growth also contributes to increased demand for healthcare services, and Maricopa County’s status as the fastest-growing county in the country should support local MOB space demand.

Moving forward, higher interest rates and economic uncertainty are expected to weigh on investment activity for all types of commercial real estate. The effect on individual sectors and subsectors, however, will not be equal, and the steady tailwinds supporting MOB demand may position the segment to hold up better than others in the coming years.