San Diego Medical Office Vacancy Continues to Drop

The San Diego medical office market has celebrated 10 straight years of declining vacancy. According to a recent medical office report from JLL, class-A medical office vacancy rate is down to 2.9%. Available product is the biggest factor driving the vacancy in the market.

“There is simply more demand than supply,” Chris Ross, EVP at JLL, tells GlobeSt.com. “We have around a half million square feet of medical office space under construction in San Diego County, but 80-90% of it is pre-leased (or owned) by health systems—so almost no new product for private practice physicians to occupy. As most of the class-A vacancy gets absorbed, class-B building owners are able to attract more tenants, often doing so through renovations to bridge the gap in demand and rent.”

No new medical office product came to market in 2019, fueling the strong market, and of the nearly half-million square feet currently under construction, 89% is already pre-leased, according to the report. “All health systems have built or will be developing new hospital facilities on just about every campus in the county due to the statewide mandate to meet new seismic requirements by 2030, and many older hospitals are becoming outdated to begin with,” Ross says.

While there is demand across the board, converting inpatient facilities to outpatient facilities is the bulk of the current development activity. “The big trend is medical office building development, driven by growing and aging population and the shift from inpatient to outpatient,” says Ross. “The pipeline of MOBs is spread throughout San Diego—even if at slower pace than the market needs. As more procedures and services see advancements in technology that essentially reduce acuity and lower risk of complication and post-op recovery time, hospital systems look to appeal to patients and reduce costs by moving those services into campus outpatient buildings, primarily surgery centers, or to locations in the community that are closer to where their patients live and work.”

Demand for new facilities is also growing as insurance providers are supporting more procedures. “CMS and insurance providers are gradually authorizing more of these advanced procedures, which is a benefit to all,” says Ross. “Physicians and healthcare organizations of every type are working tirelessly to stay ahead of the curve, and medical building owners are following suit.”