San Diego Among Top Medical Office Rents in US

San Diego is a national leader for medical office rental rates, according to a new report from CBRE. Medical office rents in San Diego average $35 per square foot, the fourth highest in the nation. The market was also fourth in terms of rental rate growth year-over-year. The strong rents aren’t hampering occupancy, either. The market is also a leader in vacancy, with the tenth-lowest vacancy rate in the market.

“In 2019, San Diego has been rated the fourth highest medical office rent market in the country,” Lars Eisenhauer, a VP at CBRE, tells GlobeSt.com. “Only four of the top 10 markets with the nation’s highest rents—San Francisco Bay Area, San Diego, South Florida and Greater Los Angeles—exceeded the U.S. average for medical office rent growth over the past year. The medical office vacancy rate fell to 5.2% in the second quarter, the lowest point since the prior peak in 2006. Overall average asking rents increased nearly 7.% over the year as the diminishing supply has fueled the increase in rent growth.”

Strong and increasing demand along with limited supply for medical office space is driving the leasing activity and rent growth. “This has been driven primarily by demand exceeding available space in most submarkets coupled with some of the highest sales prices achieved with the need for landlords to achieve a higher NOI to satisfy their pro forma and lender requirements,” says Eisenhauer. “San Diego has also seen an increase in demand from national affiliated medical groups looking to expand into the region as well as from the major health systems looking to expand their provider base to meet their patient demand. All of these dynamics have impacted the rental market and allowed it to continue to trend upwards.”

Of course, not all medical office buildings are created equal. Landlords that work with tenants on improvements are capturing the best rents and market demand. “Medical buildings with landlords willing to provide the highest level of tenant improvements are seeing the highest rates with many leases being signed with $100 to $120 per square foot in landlord provided improvements for lease terms at or in excess of ten years,” says Eisenhauer.

In terms of location, Del Mar Heights and Carmel Valley have the strongest rental rates in the market, but many popular submarkets are seeing strong medical office rents. “The UTC submarket, Encinitas and Carlsbad are all following close behind,” says Eisenhauer. “All five of these markets have very little current availability with a very limited, if any, supply of medical zoned land for future development.”