Medical Office Absorption Outpaces New Development in San Diego

Medical office absorption in San Diego is outpacing new construction activity. According to research from JLL, medical office absorption totaled 322,351-square-feet in 2018, pushing the medical office vacancy rate to 5.8%. By contrast, there is less than 91,000 square feet of new construction activity in the market in a total of two projects. As a result of the shrinking supply, asking rents for class-A product have increased to $4.29 per square foot.

“Medical absorption is very steady right now, and the lack of new development is becoming more profound,” Chris Ross, EVP at JLL, tells GlobeSt.com. “Demand is starting to notably outpace supply. Activity is coming from all directions, from existing providers in the area to new start-up players and regional and national organizations looking to expand their geographic footprint and market share. Traditional primary and specialty practices, cosmetic, fertility, concierge and other discretionary-income-targeted medicine, dental, diagnostics, clinical research and progressive medicine are all active in the market—private practices, large physician groups and health systems alike.”

The demand is widespread throughout the market, and generally strongest in population centers. The Escondido, La Jolla/UTC and Hillcrest markets had the strongest absorption last year, while the Oceanside and Vista submarkets were the only two to see negative absorption last year. “Most of the demand is naturally seen in areas with large concentrations of patients, freeway-accessible locales where practices can draw from a broad geographic area, and communities with significant growth,” says Ross. “These include Coastal North County, the 56 Corridor, the 15 Corridor including 4S Ranch and Del Sur, and Central San Diego from Downtown up to Mission Valley and Kearny Mesa. Today’s patient expects more convenient locations, nicer facilities and a better experience, and San Diego healthcare providers are responding.”

The medical office market and medical demand is strong in San Diego, and that isn’t expected to change this year. San Diego has strong population focused on health, and quality healthcare providers. However, despite the strong leasing activity, there likely won’t be any significant increase in the construction pipeline. “These dynamics are collectively driving healthcare growth in our region, the absorption of space, and in turn the need for added inventory of medical office buildings to keep up with the demand,” says Ross.  We aren’t seeing much in the construction pipeline, but where there is strong demand, tightening vacancy and rising rents, developers will find creative ways to deliver new space.”