In this episode, I cover Q2:

[1:12] State inflation and unemployment

As in the rest of the nation, the aftermath of the pandemic did not leave the state of Arizona completely unscathed. Driven by primarily fuel and utility costs, the inflation rate rose to 11%, exceeding the national average of 9.1%. Many businesses in the leisure and hospitality sector suffered job losses and struggled to stay afloat.

[1:41] Indicators of robust growth

There were several economic indicators that pointed to a strong state economy in the second quarter of 2022. Unemployment rates dropped 3.2% and there was an increase in non-farm jobs and manufacturing employment across the state. It is projected that an estimated 550,000 new jobs will be in place by 2029. A boom in mixed use and multifamily development and various stages of planning and construction are also among a few of the indicators of robust growth. 

[3:52] Sales activity

MOB asset class sales have demonstrated extreme resilience nationally during times of crisis. At the height of the pandemic, investment in MOBs declined by 2.7% nationally, however, this asset class was far less impacted by the health crisis compared to the traditional office retail and multifamily classes, which saw declines up to 43%. MOB sales were lower relative to the previous quarter by 46%, but were markedly higher year-over-year by 79%. At the end of the quarter, total dollar sales volume for MOBs reached an estimated 175 million and registered more than 1 billion over a 12 month period. It’s clear that despite fears of interest rates spikes, investor appetite for this asset class has yet to be dampened in Arizona.

[4:55] Cap rates

The capitalization rate continued to decline. Posting an average of 5.7% in the second quarter of 2022, aligning closely with the national average of 5.9%.

[5:07] Quarter headline news

The sale of a 53,000 square foot historic landmark made headline news in Q2. Nestled in the central Phoenix submarket,  Grunow Memorial Medical Center stands adjacent to Banner Health University Medical Center and Phoenix Children’s Hospital. The MOB was only 25% occupied, but was renovated, repositioned, and then sold at a 90% lease rate.

A second notable sale involved Flagstaff Medical Center. The MOB sold for 17 million, at a cap rate of 4%. The sale of this medical center demonstrated the desirability of a well-located MOB and continues the shifting pattern toward outpatient facilities. 

[6:03] Asking rents

Asking rent averages continued their ascent in Q2. In the Phoenix market, increases of 7.5% year-over-year were seen as prices per square foot rose to $28.04. This is just above the statewide average of $27.66 per square foot. Submarkets of Phoenix reported the most notable increases in rent, with the average asking rent per square foot in downtown Mesa Mesa registered at almost twice what it was in the second quarter of 2021. This was attributable to extremely low vacancy in the submarket’s medical office buildings

[7:11] Vacancy

In metro Phoenix, the vacancy rate dropped for the second quarter, sitting at 13.54%, just above the statewide rate of 11.2%. While traditional office markets are reportedly nearing over 21% vacancy metro-wide, the MOB market is holding tight at a sublease rate of 1%.

[8:33] Net absorption

Net absorption saw an increase of 49% from the previous quarter, but remained flat year-over-year. However, a solid performance is reflected in the 12 month period ending the second quarter of 2022 with a 37% increase compared to the previous 12 month period. 

Thank you for listening to our Q2 Arizona Medical Office report. Remember to download your free copy here.

Thank you for tuning into the Providers, Properties, & Performance podcast!