On-Campus MOB Growth is Back

Braun: “There are a few community-planned MOBs, but they are smaller in scale because the entitlement process is so difficult in San Diego, and candidly we’re running out of land.”

SAN DIEGO—With the land constraints San Diego faces, most of the planned and proposed medical-office development here is taking place on the campuses of major hospitals and health systems, JLL managing director Paul Braun tells GlobeSt.com. A recent report from the firm revealed that medical-office vacancy now sits at 7.8%, down fairly significantly from 9.7% a year ago, with only two submarkets (Oceanside/Vista and Escondido/San Marcos) higher than 10%. Most medical buildings in the UTC area raised asking rents in 2015, some as much as 20%, which may be having an impact on the feasibility of prospective relocations or expansions by many providers. Also, there are 12 planned or proposed MOBs in San Diego County larger than 15,000 square feet; only one is slated to break ground in 2016, and two others are expected to break ground in 2017. We sat down with Braun for an exclusive interview about the medical-office market in San Diego, where the construction is taking place and what makes some San Diego submarkets more attractive than others for this space. GlobeSt.com: Why has medical-office vacancy in some North County areas been slower to decline than in other parts of San Diego? Braun: In the past several years, we’ve had more speculative medical-office development up in the North County area. Those specified markets have one or two projects that haven’t leased up as well as the developer had wished. But there are really only three or four buildings that make up most of that vacancy. GlobeSt.com: What makes the UTC area so attractive for medical-office users that higher rents can be justified? Braun: There are several factors leading to why UTC is traditionally the best market in the county. It sits in the center of San Diego County and has great access because of the freeway systems: the I-5 and the 805 merge there, and there’s the 52 to the south and the 56 to the north that feed into the market very nicely. The other big factor is that two of the four major hospital systems have hospital campuses in that market because they’re within 15 minutes north, south and east of some of the best demographics in the county: La Jolla, Del Mar, Rancho Santa Fee, Solana Beach and Carmel Valley. GlobeSt.com: Of the planned and proposed MOBs in the market, how many are on or near campus and how many are farther out in the community? Braun: Percentage-wise, I’d say 70% or so are going to be located on hospital campuses, and it’s an interesting trend. If you’d asked me that question 10 years ago, it would have been the opposite. Most development is out in the communities, but several larger hospital systems are experiencing growth on their campuses, and that includes newer MOBs. There are a few community-planned MOBs, but they are smaller in scale because the entitlement process is so difficult in San Diego, and candidly we’re running out of land. I think you’ll see a continuous trend of repurposing of buildings for MOB. GlobeSt.com: What else should our readers know about the medical-office sector in San Diego? Braun: It’s a unique medical-office market for several reasons. Most of the hospital systems are locally based, not-for-profit systems and have been in the county for a long time—most of the hospital campuses were developed after WWII and are well-established systems—and because of their early presence, they probably kept out a lot of for-profit competition. The other factor is, as the county has grown, most of these hospital systems in their strategy had figured out the geographic locations in which they wanted to establish their presence. But now we are seeing hospital systems compete head to head for more patients throughout the county. Sharp was predominant in the mid to eastern part of the county, and Scripps was more coastal North County, but they are now both flip-flopping and competing in markets the other was traditionally serving.