How San Diego Medical Office Users Are Dealing With Record Rents

San Diego has some of the highest medical office rents in the country. In fact, a recent report from CBRE showed that the market had the fourth highest medical office rents in the country. For medical office providers, the rapid increase in rents has been a shock, and many tenants are looking for ways to curb the higher leasing costs.

“The increase in rental rates countywide has been a shock to medical providers as they look for ways to offset the higher overhead,” Lars Eisenhauer, VP of CBRE, tells GlobeSt.com. “Tenants are signing longer-term leases in an effort to achieve a higher level of concessions from Landlords typically in the forms of rental abatement and tenant improvements. Some providers are focusing their real estate strategy on ownership over leasing to help control costs however it can often be difficult for them to find such opportunities in a market with limited supply. Even with the higher rents, San Diego has experienced a higher level of leasing demand.”

Next year, the strong medical office rent growth will continue, particularly in tertiary submarkets. “In 2020, we anticipate seeing a continued increase in medical office rents with a focus on tertiary markets where tenants will seek rent relief and owners able to bridge the gap on this with a steady increase in their rents, which will still appear lower than market,” says Eisenhauer.

While rents will continue to rise next year, demand is also still on an upward climb. “Vacancy rates should continue to stay low, with no new available speculative development underway and demand prevalent,” says Eisenhauer. “Asking rates should slowly increase as the market tightens further. South, East, and North County submarkets in particular have extensive runway for higher asking rates.”

As a result of the strong demand, Eisenhauer also expects more repositioning projects that will bring medical office supply to the market. “We also anticipate more office buildings being positioned as medical buildings where zoning and parking requirements can be satisfied which will also bring new inventory to the market at higher rates than previously witnessed,” he says. “ A good example of this is in Rancho Bernardo where Virtus Real Estate Capital purchased the former Sunroad Financial Plaza, which has now been rebranded as RB Medical Plaza.”