Medical office rents in Los Angeles are among the highest in the nation. According to a recent report from CBRE, medical office rents this year were the third highest in the nation. In the second quarter medical office rents increased .9% to $33.84 per square foot year-over-year, and the trend continued through the end of the year. A supply shortage is behind the increase in rents. During the same time period, the vacancy rate decreased 177 basis points to 5.8% over the same period.
“There is a lack of space,” Angie Weber, first VP at CBRE, tells GlobeSt.com. “We have had very little new construction for medical office in the last 25 years. Because the providers are starting to do things very differently, like go off campus and go into the neighborhoods to be amongst the rooftops, you have all this new space being gobbled up. That is obviously raising the demand.”
In addition to looking to migration into neighborhoods, providers—of which there is a large market in Los Angeles—are beginning to expand. “We are very fortunate in Los Angeles. We have a lot of large providers and a lot of health systems, and we have a lot of independent health systems too,” explains Weber. “A lot of larger providers are going out and buying different practice groups to create their own network. That has created a need for larger blocks of space. That is also driving the market.”
Despite the rise in rents, the construction pipeline for medical office isn't increasing. With limited land, construction prices and competition from other asset classes, there is limited new space coming onto the market. “There might be a very small amount of new construction, but the problem is that we don't have the land and it is very expensive,” says Weber. “My team and I are working on four new development projects in Pasadena, Downtown Los Angeles, Palmdale and L.A./Beverly Hills adjacent. They are development projects, and while I do think that they will all get built, at this point they are just planned projects. Medical is expensive and you really need to have the stomach and the wherewithal to stomach it.”
One issue: there is little to no speculative construction in the medical office market. That hinders new development opportunities. “Developers are going to want tenancy before they start construction, and healthcare providers don't move at a quick pace,” adds Weber. “Very rarely do you see speculative development, but it is too expensive of a space to build on spec.”
Even with the strong rent growth, Weber does not expect an increase in speculative development of medical office space. “Rent growth has been really consistent, and we have started to see the uptick in the last 24 months,” she says. “I think that in certain markets there will continue to be growth in the rent because of the lack of inventory, but I think that it will be pretty consistent.”
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Kelsi Maree Borland
