Medical Office Is on Fire in San Diego

The medical office market in San Diego is on fire. Last year, the medical office vacancy dropped to 5.2% in the market with class-A vacancy dipping below 3% to 2.9%. Healthcare industry changes and new entrants in into the market have driven the demand and leasing activity.

“There’s a lot of change in the healthcare space, and with change comes new competition, new delivery models, heightened focus on the best quality care at lower costs, and general confidence that healthcare is moving in the right direction on just about every level,” Chris Ross, EVP at JLL, tells GlobeSt.com. “Physicians and other healthcare providers need to remain relevant, community facing, and well branded.  With that comes movement toward more accessible locations and nicer, more inviting and comfortable space.”

The new activity and entrants into the market has also driven demand for high-quality and new medical office product. “All of this is collectively driving flight to quality, especially in regions like Southern California where experiential expectations may be higher from patients,” says Ross. “Recruitment and retention also come into play.  Health systems compete with each other to attract and retain physicians, so they must appeal to physicians’ desires to be in convenient locations with appealing work environments for the doctors and staff.”

San Diego isn’t the only market experiencing a surge in medical office demand. These trends are present throughout the nation, and as a result, medical office overall has seen an upward trend. “Medical office demand is at elevated levels throughout the entire country, for most of the same reasons,” says Ross. “On the one hand certain areas like Phoenix and the Carolinas may be experiencing more population growth and development, without the constraints of being landlocked like we have in San Diego; but on the other hand you might see more stability in coastal California regions because this is where more people want to live and work, meaning consistent interest from physicians who want to practice here, as well as a more stabile economy, home values, all of which affect demand for healthcare services.”

As a result of the leasing activity—which comes with rising rents—tenants are showing increased demand for owner-user deals. However, those opportunities are limited. “Most building owners are looking at the market and making an educated guess that their space is going to lease relatively soon, so why sell?  If they do sell, for the same reasons, they expect a premium,” says Ross. “There is still plenty of demand for owner-user properties as tenants look to shore up the rising rents they’ve been experiencing, and in many cases it still makes sense for the buyer to pay that premium.  There just aren’t many options out there, especially for existing practices that have a relatively small window to find something before they must renew their lease.  But if it’s out there, we’ll find it!”