Who's Buying Medical Office Now?

Ross: “Many physicians and other providers have decided that if they are going to endure this steady rise in rents and construction costs, they would prefer to invest those dollars in their own real estate.”

SAN DIEGO—The recession-resistant medical-office niche has attracted the attention of many new REIT , institutional and private investors , JLL VP Chris Ross tells GlobeSt.com. The firm recently released a report stating that class-A medical-office vacancy in San Diego decreased by 50 basis points from the previous quarter to 6.1%, class-A medical-office rents are now just $0.03 off the previous high-water mark of $3.45 per square foot in 2007 and there is 206,680 square feet of medical-office construction currently in San Diego. We spoke exclusively with Ross about where this construction is taking place, trends to watch for and other investment information regarding this sector. GlobeSt.com: In which submarkets is medical office construction taking place? Ross: The vast majority of construction is taking place in UTC, Carmel Valley and the I-15 corridor. GlobeSt.com: How would you characterize the locations? Ross: There are several medical buildings currently under construction or recently completed. In UTC, the 175,000-square-foot John R. Anderson Medical Pavilion on Scripps ‘ campus just opened to the public. Also in UTC, grading is underway for the 150,000-square-foot outpatient pavilion on UCSD ‘s campus. Additionally the 14,000-square-foot UCSD medical building at La Jolla Village Professional Center (off campus next to Rock Bottom ) was recently completed. UCSD will be opening an urgent care and various specialty offices there later in the year. Further north, two other off-campus buildings are under construction. Merge Carmel Valley , a 35,000-square-foot mixed-use retail /medical development , is under construction and scheduled to be completed in September of this year, and the 100,000-square-foot Sharp Rees Stealy Rancho Bernardo medical building is under construction above the I-15 freeway—scheduled to be completed in late 2017. There are several noteworthy proposed projects as well—all off campus, further highlighting the trend of hospitals and medical groups looking to expand their networks into locations that are more accessible to patients. In Sorrento Mesa, Kilroy Realty is about to announce an exciting new MOB it is in the process of designing with their architects. It will be known as Pacifica Health Center , a 118,000-square-foot development at the corner of Mira Mesa Blvd. and Pacific Heights Blvd., three blocks off the freeway. In Carmel Valley, another exciting new project called Village North at Pacific Highlands Ranch is in the design and pre-leasing stage. It is part of the master-planned Pacific Highlands Ranch development at Del Mar Heights Rd. and Carmel Valley Rd., where the Trader Joe’s shopping center was recently completed. Village North will include 30,000 square feet for retail, medical and dental services to accompany the luxury apartments and townhomes above and adjacent to the commercial space. Finally, at North Coast Medical Plaza II in Carlsbad, a private developer is working on pre-leasing for a second 50,000-square-foot medical building at the corner of Palomar Airport Rd. and Hidden Valley Rd. It will be built next to NCMP I, which is nearly 100% occupied. GlobeSt.com: Any other big trends to watch for? Ross: Two other trends: 1)     Construction costs have risen dramatically due to a) new Title 24 requirements, b) how busy contractors are and c) higher cost of materials. This is resulting in landlords providing higher tenant-improvement allowances, although they are making up for it with the rising rental rates and reduced concessions we are experiencing. It is also leading to less time on the market for high-quality built-out medical space. 2)     Investment and owner-user sale activity is up significantly. Medical office proved to be recession resistant during the early 2010s when everything else was struggling. This caught the attention of the investor community and has opened the flood gates to many new REIT, institutional and private investors entering the niche. Returns in the healthcare real estate sector have generally been very attractive as income potential and property values climb. Further, for a variety of reasons, market fundamentals have been very strong in healthcare , and with tightening vacancy have come a rise in occupancy costs. Many physicians and other providers have decided that if they are going to endure this steady rise in rents and construction costs, they would prefer to invest those dollars in their own real estate. Buying commercial property does not fit all practices’ business models, and finding attractive medically zoned property with a good location and ample parking can be very difficult. But under the right circumstances and in certain areas, doctors, medical groups and health systems are hunting down such opportunities. GlobeSt.com: What else should our readers know about San Diego’s medical-office market? Ross: The San Diego medical-office market is an industry that is evolving at a pace that rivals the technology sector. The clients are sophisticated and the tasks and transactions challenging. From a macro level, San Diegans are fortunate to have great access to excellent and extremely advanced healthcare, with highly accomplished and respected hospitals and physicians and some of the most intelligent researchers the world has to offer (literally). UCSD, Kaiser , Scripps, Sharp and Rady Children’s Hospital are all nationally recognized, and as they continue to seek out advanced technology and improve accessibility and quality of facilities for their patients, our community as a whole will be the biggest benefactor. At the same time, vacant medical office space will continue to be removed from the market. More development and repurposing of office or retail space to medical and surgical facilities will inevitably occur. Right now this is already overdue.