A rise in outpatient and medical office vacancies in San Diego in Q3 2024 is not what it seems. Instead, higher vacancy – now at its highest level since Q1 2022 — has been driven partly by building owners that have vacated office tenants to convert spaces they occupied to medical offices, according to new data from JLL.

The report found that owners planning this type of transformation are focusing on small to mid-sized blocks while also transitioning to triple net lease (NNN) rents.

“Ground-up MOB [medical office building] development is currently just 60,000 SF (one building). Modest supply relief is expected to come from a handful of pending and proposed conversion projects,” the report stated. It noted that high interest rates, inflated construction costs, lack of available land and other barriers to entry have stymied new MOB development. Indeed, new deliveries since 2014 have been on average over 81,226 square feet per year below demand.