By Mark Carlisle
A larger, wealthier population, three successful hospitals and adapting offices have helped Glendale carve its role in the fastest-growing medical office market in the nation.
According to a 2018 report from CBRE, metro Phoenix led the nation in medical office net absorption, the rate at which medical office businesses are added to the market against those that left, between 2017 and 2018. The Phoenix metro area added 769,000 square feet of functioning medical office space. Only five of 30 other markets measured added even a third of that amount.
Vince Femiano, a CBRE health care broker in Phoenix, said the West Valley’s surging population and changing demographics was a key factor in Glendale’s evolution as a medical office submarket.
“It was kind of like lower population, lower income, and now it’s turned into more of an affluent population with health care coverage and that’s why you have three thriving hospitals and medical office growth,” Mr. Femiano said.
Glendale’s three hospitals are Banner Thunderbird, Abrazo Arrowhead and St. Joseph’s Westgate Medical Center, run by Dignity Health.
“People in Glendale have great service,” said Kate Morris, another CBRE Phoenix broker, noting that all three hospitals are upgrading and catering to the Glendale population.
One national change to the health care market that Glendale and the Valley have encountered is a decline in solo practitioners.
“You don’t see as many doctors out on their own. They’re combining with other groups or joining a hospital system,” Ms. Morris said.
The change comes largely because of doctors’ struggle to afford solo practices. Another Phoenix health care broker, Michael Morton with Medical Office Brokers, said he’d heard of this shift in other markets first but didn’t see it take full shape in Phoenix until the past few years.
“It’s not quite as corporate as the rest of the country, and so I think that these docs here were trying to hold their ground a little longer and then finally had just give of given up the fight and realized that if they’re really going to compete they’ve either got to join a larger group or go with a hospital,” Mr. Morton said.
Ms. Morris and Mr. Femiano also noted that today’s young doctors like joining larger groups because it allows them to focus on care rather than administrative duties.
While he noted that some doctors can remain in an independent office, while affiliating with larger health care groups, Mr. Morton said most of the demand for medical office space in Phoenix today is for three or four doctors in the same building, which is usually a space of 3,000-4,000 square feet.
“We’re having to move tenants around and trying to find larger blocks of space to accommodate these bigger groups, where it used to be a lot smaller groups, solo practitioner type set ups,” Mr. Morton said.
Ms. Morris also noted that older facilities with smaller suites are being renovated to meet the market needs.
“They’re being redeveloped, refocused, repurposed if they’re bought right,” she said.
Mr. Femiano noted that markets will always have some vacancy, largely because of old facilities that don’t match the market and haven’t been renovated.
“As the occupancy goes up, you’ll still have a couple properties in between that just don’t fit the current atmosphere of medical office space,” Mr. Femiano said.
While most of MOB’s listing are in the East Valley, Mr. Morton said he noticed a lot of those small, antiquated office spaces in Glendale, including one he recently sold at 5750 W. Thunderbird Ave., just north of Banner Thunderbird.
Mr. Morton said he and his team weren’t confident they could sell the space because of its condition and out-of-date small offices.
“We’re like, ‘I don’t know if this will ever sell? I don’t know if anyone wants to buy an old, rundown, 1,100-square-foot condo,’” he said. “There’s just a lot of small spaces in that building that there just aren’t the doctors for and there isn’t really the money to build them out. They’re just kind of sitting dormant.”
According to Ms. Morris and Mr. Femiano, Glendale’s three hospital systems have done a better job at staying current. So is a new medical office complex next to Abrazo Arrowhead called Arrowhead Orchards Medical Center. The center was built on speculation, meaning it was built before tenants were found, in 2016. It was the first spec medical office built in the Valley since the recession, and it seems to have paid off.
“The demand for physician offices there, and the demand for the hospital and other groups, it’s going to help feed the (market) need… by offering something newer and more efficient that the younger physician groups would lean more toward occupying,” Mr. Femiano said.
Mr. Morton also said the Arrowhead neighborhood in north Glendale is a region where medical offices have learned to adapt to the changing market.
“In some of their old buildings, they are smaller spaces but the landlords have recognized and started converting them into larger spaces and combining two spaces together,” Mr. Morton said.
Mr. Morton said Arrowhead was “a really strong market” with demographics similar to Scottsdale, where most of his listings are. Because of a low vacancy rate, Arrowhead can collect higher office rents.
While metro Phoenix led the nation with a 2.6 percent drop in vacancy rate, it still has the eighth-largest vacancy rate in the nation at 14.6 percent.
The Valley’s vacancy rate has room to drop. A third of the markets studied by CBRE had half the vacancy or less of Phoenix’s 14.6 percent. The smallest rate — Louisville, Kentucky — is 4.2 percent.
Nevertheless, medical office construction has continued. Phoenix added about 500,000 square feet of new medical office space between 2017 and mid-2018, the fourth-most of any market.
The growth has continued since then. Among other projects, Banner is currently constructing a four-story, 240,000-square-foot hospital in Chandler. In December, HonorHealth broke ground on a three-story, 210,000-square-foot hospital in north Phoenix. Mayo Clinic plans to add 1.4 million square feet to its Phoenix campus over the next five years, nearly doubling the campus’ size. Mercy Gilbert Medical Center is adding a medical tower for women’s care.
Since 2010, Phoenix ranks eighth in the nation in medical office net absorption, adding nearly 2 million square feet of offices.
Rent rate of medical offices in the Valley increased by 4.3 percent, the 10th largest jump of 31 markets studied by CBRE, to $24.30 per square foot, $1.40 above the national average.
In addition to population growth, the expansion of the Valley’s medical office market came due to a changing market that breeds fewer solo practitioners, expanding hospitals and larger medical office spaces. Hospital systems are also hurrying to construct primary care or specialty in neighborhoods to grab a market share and get patients into their system.
“There is quite a race here between all the hospital systems, to plant their flag and get into a certain neighborhood and be the main (provider for residents),” said Kate Morris, a CBRE health care broker in Phoenix.
Mr. Morton said these facilities are less about the success of the facility itself and more about getting patients into their hospital system, so they’ll continue to come to them for care, whether at that facility or another.
Mr. Morton noted that a few facilities had shut down after trying to enter a market that was already saturated.
That wasn’t the case when Dignity Health entered the Westgate Entertainment District area with St. Joseph’s.
“In reality, it was a great strategic move for them to control that population. And they’re busy,” Mr. Femiano said.
Another change in health care is more stand-alone emergency departments and micro hospitals, which give an alternative for minor injuries to the long waits at traditional hospitals.
“They’re saying, ‘Well if the kid just sprained his ankle, just come to ours. It’s quick and easy and you don’t have to wait as long,’” Ms. Morris said.
Mr. Morton noted that surgery centers are another new example of a service being pushed out of hospitals.