Arizona's rapid population growth is fueling a significant transformation in the healthcare real estate market. As new residential communities expand, there is a growing demand for medical services to be delivered outside of traditional hospital campuses, pushing development towards more convenient and cost-effective outpatient facilities. This shift, however, is met with the formidable challenge of soaring construction costs and a shortage of skilled labor, forcing developers and providers to adapt their strategies.
Key Takeaways
- Arizona's population boom is driving demand for healthcare services in newly developed residential areas.
- There is a major industry shift from large hospital campuses to smaller, community-based outpatient facilities like ambulatory surgery centers (ASCs).
- Patients prefer the convenience and lower cost of local clinics for non-emergency care.
- Rising construction costs, with materials up as much as 80%, and labor shortages are slowing new development.
- Private equity investment is a key factor in the expansion of ASCs, creating new opportunities for specialty physicians.
The Move Away from Traditional Hospitals
The model of centralizing all medical care within a large hospital is becoming outdated. Today's patients, particularly in sprawling suburban areas like those across Arizona's Valley, are seeking care that is easier to access and less intimidating. For routine checkups or minor procedures, the preference is for facilities closer to home with simple parking and a more personal atmosphere.
This consumer demand aligns with a broader industry trend to make healthcare more efficient. Perry Gabuzzi, a senior vice president with Kidder Mathews, notes that medical office development is naturally following residential growth. “New home developments means medical office is stretching out to accommodate those communities,” he stated, adding, “And I think we’ll continue to see that.”
“Patients don’t really love to go to a hospital campus for everyday patient care. If you’re just walking around and you’ve got a regular checkup, you want to do that in a location that’s closest to home and easy to park at.”
– Perry Gabuzzi, Senior Vice President, Kidder Mathews
This decentralization trend began roughly a decade ago, with major hospital systems like Banner Health pioneering regional clinics. Philip Wurth, a senior vice president at CBRE, explained that this strategy of bringing services directly to patients has since been adopted by nearly everyone in the industry, from large networks to private physicians.
Ambulatory Surgery Centers Lead the Charge
One of the most significant areas of growth in this new landscape is the ambulatory surgery center (ASC). These specialized outpatient facilities allow for a wide range of surgical procedures to be performed without requiring an overnight hospital stay. This model offers substantial benefits for both patients and providers.
For patients, ASCs provide a more comfortable and less costly alternative to a hospital. Julie Johnson, an executive vice president with Colliers, emphasized this point. “The highest cost to deliver healthcare is in the hospital,” she said. “People are trying to keep patients out of the hospital and care for them in lower-cost settings such as ambulatory surgery centers.” The ability to recover at home is a significant draw for many.
Private Equity Fuels Expansion
A major catalyst for the growth of ASCs is the infusion of capital from private equity firms. These investors see ASCs as a stable and profitable opportunity, especially when partnering with specialty physician groups. This financial backing allows for rapid expansion into high-growth markets across Arizona.
Vince Femiano, managing director of Transwestern’s healthcare advisory team, observed that this trend is accelerating. “ASCs are back. Physicians are starting to team up with private equity, and there’s a new infusion of funds in the marketplace,” he said. This partnership between medical expertise and financial capital is creating a powerful ecosystem for outpatient surgical care, giving specialty doctors more autonomy and resources to open their own centers.
Construction Hurdles Slow Development
While the demand for new outpatient facilities is clear, bringing these projects to life has become increasingly difficult. The primary obstacle is the dramatic rise in construction costs. Contractors report that essential materials like fuel, asphalt, and steel have seen price increases of up to 80%. At the same time, labor expenses have climbed more than 20% in just two years.
These financial pressures, combined with a shortage of skilled construction workers, have significantly slowed the pace of new ground-up development. Kevin Smigiel, vice president of Transwestern's Phoenix healthcare advisory service team, highlighted the scarcity of new projects. “There’s been maybe four medical offices to have truly come out of the ground in the last two years,” he noted. “Most of them are all anchored by a hospital.”
Repurposing Over New Construction
Due to the high costs and long timelines of new builds, which can take over two years, many developers are shifting their focus. The strategy now often involves finding existing buildings that can be repurposed for medical use. This approach is faster and can be more financially viable, helping to meet immediate demand without the risks associated with ground-up projects.
This reality has created a market where only the largest players, such as hospital systems and well-funded investment groups, can afford to build new facilities from scratch. Smaller, independent physician practices often find themselves priced out of new construction, leading them to lease space in existing medical office buildings.
Adapting to a New Market Reality
The combination of high demand and significant development barriers has spurred more leasing activity within existing properties. “Since there’s not a lot of new activity, that has spurred more leasing in the existing medical office buildings that we have,” explained Julie Johnson of Colliers. This keeps services expanding but limits the supply of modern, purpose-built facilities.
The current environment forces a reliance on creativity and strategic partnerships. Repurposing existing retail or office space into medical clinics is becoming a common solution. This adaptive reuse allows healthcare providers to establish a presence in growing communities more quickly and affordably than building new.
Ultimately, the healthcare real estate market in Arizona reflects a broader economic story. While population growth creates immense opportunity, it also exposes vulnerabilities in the supply chain and labor market. Delivering modern, accessible healthcare in the state's booming communities will increasingly depend on innovative solutions, strategic investment, and the ability to adapt to persistent economic pressures.
