The doctor’s office market in Phoenix was a bright spot during the pandemic. The market has been one of the most active and sought-after in the country, and the momentum hasn’t slowed over the past year. In one of the last transactions, Cushman & Wakefield brokered the sale of a class A detached medical office building in Chandler for $ 6.5 million. The property is an example of market activity.
“Phoenix has long been seen as a strong market for medical offices because of its steady population growth and demand for medical offices. However, the COVID-19 pandemic offers a unique glimpse into the resilience of medical office tenants. ” Sheila Bale, Managing director at Cushman & Wakefield, tells GlobeSt.com. “Despite several weeks of forced closings of clinics, outpatient surgery centers, imaging centers and other outpatient treatment facilities at the beginning of the pandemic between mid-March and beginning of May 2020 and despite the fear that many patients would simply have to leave their own four walls during this difficult time, the landlords Doctor’s offices in Phoenix are still collecting almost 100% of rent owed by tenants and buildings. “
In addition to the strong cash flow, leasing activities and signs of wear and tear in medical practices were also stable due to the pandemic. “In contrast to the traditional office market, vacancies in medical practices remained low, as only a few tenants returned space or brought space for subleases on the market,” says Bale. “Low vacancy rates combined with increased construction costs have created the basis for rental growth that is emerging in markets like Phoenix. Unsurprisingly, investors have taken note of all of this and have compressed return expectations as a result. “Nashville-based Montecito Medical Real Estate acquired the Chandler property. The buyer is one of the largest medical property owners in the country. Out-of-state shoppers have become typical of Phoenix health products. “It is not uncommon for such stabilized medical office buildings not to require a local presence to own and operate the building.” Tom Weinhold, Managing director at Cushman & Wakefield, tells GlobeSt.com. “In contrast, buildings with multiple tenants and significant vacant space that need to be rented are more often owned by local or regional investors who may already be present in this market. A lot of new capital has flooded into the medical office space in the past 12 to 18 months, but much of that capital is being used for business behind seasoned operators as opposed to direct investment by new buyers.
There has been some tremor among active players lately. REITs have become less active due to the pandemic, which has led to private equity buyers. “Historically, REITs have been some of the most active buyers in medical practices, but low equity values drove many of those players offside for much of 2020,” added Weinhold. “During that time, private equity more than made up for the shortfall by maintaining similar annual transaction volumes across the country while compressing cap rates by 50 to 75 basis points. With private equity still hungry for deals and REITs now getting more active, we expect 2021 to be a very competitive year for investing in medical practices. “
Weinhold expects similar market activity this year: “Due to current trends, we see sustained growth in demand for medical practices, especially in markets where new homes and industries are being developed and there are currently no health facilities.”
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