MEDICAL OFFICE MARKET OVERVIEW

In the Third Quarter 2011, medical office sales transactions demonstrate that investors are recognizing opportunities in acquiring medical office properties, both as investors and owner/users. There are still many significant distressed transactions affecting the market, representing 40% of all sale transactions.

The medical office leasing market economics are holding relatively steady in terms of lease rate and vacancy from the previous two Quarters; however, investors would like to see an increase in the rates and decrease in vacancy. The net absorption for the Third Quarter 2011 is negative 13,617 square feet, up from a negative net absorption of 36,001 from the Second Quarter 2011, for a total year-to-date net absorption of negative 49,618. The net absorption for Third Quarter 2011 is comparable to a year ago of negative 11,975 square feet.

LEASE ACTIVITY

For all medical office buildings in Maricopa County 10,000 square feet and larger according to CoStar of the 286 medical properties totaling 10,586,764 square feet of rentable building area, there was a 33% vacancy rate, up 2% from Second Quarter 2011. While the vacancy rate has slightly increased in the Third Quarter, it has remained approximately 30% for year-to-date 2011. The average gross lease rate for the Third Quarter slightly decreased from previous Quarters to $22.14 per square foot; however, the year-to-date gross lease rate has been holding above $22.00 per square foot and only decreasing 2% quarterly.

SALES ACTIVITY

In the Third Quarter 2011, there were a total of 33 medical office sales transactions with an average cap rate of 10.39%, up 0.69% from the Second Quarter 2011. Similarly, the average cap rate in the First Quarter 2011 was 10.25%. Approximately 40% or 13 out of the 33 transactions this Quarter were distressed properties. As a result, the values were lower and hence, the cap rate increased.

The total sales volume for Third Quarter 2011 was $12,256,236, with property sizes ranging from 2,181 square feet to 32,130 square feet and an average property size of 7,320 square feet. The average price per square foot for all Third Quarter medical office sales transactions was $97.38, which has remained fairly consistent with the previous two Quarters.

The Third Quarter realized 13 distressed medical office sales transactions. Total sales volume for these properties was close to $6 Million Dollars, with an average purchase price of $88.54 per square foot (up from Second Quarter 2011), transferring approximately 108,761 square feet of medical office property to new ownership. Approximately 40% of these new owners were owner/users.