Strong medical office leasing activity has fueled investment sales volumes and pricing in San Diego. This year, medical office vacancy rates have fallen to 6.2% in San Diego County, with more than 107,000 square feet of net absorption, according to a report from JLL. The activity has fueled both owners to bring properties to market and take advantage of higher pricing.

“The success of most any real estate investment starts and ends with leasing,” Chris Ross, EVP at JLL, tells GlobeSr.com. “Investors are generally experiencing rising cash flow as the growth in health care drives demand for outpatient medical facilities and medical office space, replacing vacancy with rental income. As vacancy falls, rental rates of course climb, and they are now at all-time highs across the county and for the most part across the country.  Additionally, when investors take their properties to market, the strong leasing activity and upward trend in rents allows them to more aggressively underwrite the asset and sell the property at a higher price.”

Some investors haven't caught on to the new market conditions—which have changed rapidly this year—and have been hesitant to pay premiums as a result of climbing rents. Ross says that those investors are passing good opportunities in a market where many are willing to be very competitive to win deals. “The buyers who do not acknowledge the market's strong leasing fundamentals are having to pass on good-quality assets since they can't get there on price.  It is almost forcing buyers to go all-in on that particular asset to win the deal, which can be nerve racking, but fortunately for investors we are still not seeing any signs that activity is slowing down,” says Ross.