San Diego Medical Office Rents Up 5.2% in 3Q

Substantial new leasing demand for medical office space has pushed rental rates and strong occupancy in San Diego, according to a new report from JLL. Medical office rents have increased 5.2% in the third quarter, year-over-year, along with positive absorption.

The increase in rents is a function of two main factors. The biggest is simple supply and demand as we are seeing the vacancy factor below 6% for quality class-A and class-B medical office space. The other is due to the increase in construction costs as landlords/owners are having to provide more money in tenant improvement allowances thus pushing rates, “Paul Braun, managing director at JLL, tells GlobeSt.com

The leasing demand helped to drive 70,000-plus square feet of positive absorption and has pushed occupancy gains. While the current vacancy rate trends above the third quarter in 2019, JLL forecasts the vacancy rate will fall below 5% in the next six to 12 months. There are currently only nine properties larger than 10,000 square feet in the market, but the majority of demand is in the 3,000 to 7,000-square-foot range. “The already well-designed built-out smaller suites less than 2,000 square feet are also in demand which allow smaller medical provider to take advantage of a quicker commencement and a lower tenant improvement burden,” adds Braun.

Limited new supply is also helping to fuel occupancy gains. There is currently only 321,000 square feet of new product under construction, and in the short-term, Braun doesn’t expect an increase in development. “One would think we should see an increase in construction in the long term but on the short term our delivery pipeline is well below what we see the real need and demand from our healthcare providers,” he says. “A lot of us in the San Diego County healthcare market we’re concerned about this scenario several years ago, as our lack of land, medical zone parcels and our cumbersome municipal approval processes indicated this situation may occur.”

As a result, Braun is expecting rent growth and occupancy gains through 2021. “We would think that rental rates for quality buildings with quality space with continue to rise and the vacancy factors, especially for class-A and class-B space to further taper,” he says. “We also think opportunistic developers will look for creative solutions to our supply problem and seek conversion, retail and expansion opportunity to try and meet short and long term demand.”