Medical office product in San Diego delivers a remarkable amount of stability. The asset class is in limited supply with limited new construction coming online but tremendous demand and rising rents. As a result, the market is attracting investors from across the country. Chicago-based MBRE Healthcare recently purchased the 83,213-square-foot Excel Centre for $37.1 million. The property is anchored by Kaiser Permanente, and can be converted into a full medical office facility, which would command 20 to 25% premiums in rents. To find out more about the demand for medical office in San Diego, the players in the market and why medical office is such a popular asset classes, we sat down with Travis Ives, senior director of the healthcare practice group at Cushman & Wakefield and a broker on the deal, for an exclusive interview.

GlobeSt.com: Tell me about the investor demand for healthcare/medical office product in San Diego, and what is driving that demand?
Travis Ives: A few things impact the way the medical office investors view San Diego. First, demographics are increasingly important as investors look to allocate funds to markets with a strong underlying economy and expected population growth, both of which San Diego has. Second, San Diego has historically been a market with relatively high barriers to entry. There is a limited supply of existing medical office product and the cost of new construction requires a significant rent premium. This provides a level of comfort to medical office investors knowing it is unlikely the market will become oversupplied with space and therefore rents should remain stable or increase over time.

GlobeSt.com: What does the investor pool look like for this product, and have you seen it change at all over the last year?
Ives: Institutional-quality medical office investment opportunities have been few and far between in San Diego. When the most appealing ones have come to market, they've attracted some of the most aggressive institutional buyers. Historically San Diego's medical office inventory was locally owned and operated. Over the past 5-10 years we've seen an influx of national buyers that have bid up opportunities beyond what the local investor pool would pay. We now have some of the largest medical offices investors in the country that own and operate buildings in San Diego County (Welltower, Ventas, HCP, MBRE, Anchor Health Properties, Montecito, LaSalle). These buyers are a mix of public and private money, but all are specialized in medical office investments and look at San Diego as a safe long-term bet.

GlobeSt.com: The buyer for this property was from Chicago. Are you seeing an increase in outside buyers?

Ives: Yes, for reasons stated above, San Diego is attracting capital from all over the country. Good demographics, high barriers to entry and the presence of strong healthcare systems.

GlobeSt.com: What is competition like for medical office?
Ives: When it comes to the core investment opportunities, competition is fierce. Buyers are partnering with outside capital to find the lowest cost of funds that will allow them to bid up pricing and win deals. As you start looking at the core plus and value-add space, the increase in risk and required “hands-on” approach to management leads to a more localized buyer pool and yields adjust upwards accordingly.

GlobeSt.com: What is your outlook for the medical office market in San Diego this year?
Ives: Vacancies will remain low supported the high cost of new construction and steady demand from tenants. This will lead to continued rent growth and possibly some new construction in markets with the best demographics and population growth (mainly North County). Investment activity will be on par with previous years, but pricing may have reached its peak with the cost of debt now climbing and cap rates already at historically low levels.