Leasing Drives Big San Diego Medical Office Investment Demand

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.

While demand is strong for medical office, these higher prices are also fueling rental rate increases. “The investor has just closed on a property that they had to aggressively underwrite to be selected, and that in turn almost forces the investor to raise rents in the building,” adds Ross. “At some point soon, however, we will reach a saturation point and rent growth will flatten; but the supply-demand equilibrium will remain, and there is nothing to suggest that will change in the foreseeable future.”

Overall, both the leasing and investment activity is a sign of San Diego’s strong healthcare market. “Other foundational factors also create a very stable base for our healthcare market, such as strong demographics, excellent pharmaceutical and medical research institutions, proximity to the Pacific Ocean, unbeatable weather, and the fact that once people move here, they rarely leave, which would include physicians and their desire to practice here,” says Ross. “Healthcare in our region will continue to thrive in 2019 and long term.”