San Diego Medical Office Vacancy Lowest Since 2006

San Diego’s medical office vacancy rate has fallen to its lowest point since 2006. According to research from Cushman & Wakefield, the medical office vacancy rate fell to 6% in the second quarter, 800 basis points lower than the height of 14% in 2009. As vacancy continues to fall, medical office rents have inched up to $3.10 per square foot, a 1.3% year-over-year increase.

“An aging population and increased number of insured patients are driving the need for additional healthcare,” Joe Zurek, senior associate of the healthcare advisory practice at Cushman & Wakefield, tells GlobeSt.com. “Faced with the need to expand services and at the same time cut costs, healthcare providers are increasingly consolidating into larger groups that are relocating into newer and larger spaces.”

Investment capital is responding to the strong leasing activity. Capital is also turning to medical office as a late-cycle play for its relative stability. “Medical office has always been looked at as recession resistant,” says Zurek. “Healthcare tenants typically sign longer term leases, move less often and default infrequently. Given the length of the current real estate cycle, buyers are looking at medical office as a good hedge against a potential downturn. This has attracted new capital to the space that was not there five years ago.”

As a result, the buyer pool for medical office in San Diego is changing. “The buyer pool for medical office was once made up of a handful of healthcare-focused REITs that bought medical office along with senior housing, skilled nursing and other healthcare asset types,” says Zurek. “They’re now finding themselves competing with private equity, as well as foreign capital, which has led to cap rate compression. We’re also now experiencing segmentation within the medical office investment market, with buyers focusing on specific niches of investment types further driving competition in the space.”

In the second quarter, absorption was positive 23,000 square feet. In total, San Diego’s medical office market occupancy has gained 40,000 square feet year-to-date. The positive absorption is expected to continue through the end of the year. “We expect the absorption of quality space to continue through the end of the year, driving declining vacancy rates throughout the county,” says Zurek. “Meanwhile, we anticipate average asking rent to remain steady.”