SAN DIEGO—The UTC submarket has by far the highest concentration of physicians in the county, while the entire 78 Corridor has had a disproportionately high amount of new medical-office development, JLL SVP Chris Ross tells GlobeSt.com. According to the firm's Q2 medical-office report for the San Diego region, the four submarkets with the lowest vacancy rates are Kearny Mesa (4.1%), East County (5.0%), South County (5.7%) and Uptown/Hillcrest (6.2%), mainly due to next-to-nil development of multi-tenant medical-office product in these communities over the past 10 years.

The report also revealed that 2017 will likely come to a close with record-setting medical-office investment metrics across the board in sales volume, cap rate and price per square foot. Moreover, 10 years ago, there were only three or four MOB owners that were institutional, multi-market players that specialized in healthcare, whereas today at least a dozen of these firms own healthcare real estate in San Diego County. Welltower, Ventas, CNL, Anchor, Carlisle, Northstar, ARC and Virtus have all acquired medical buildings recently, and nearly every other household name wants to join the party.

As far as leasing goes, the report showed that most of the leasing activity is coming from three-to-six-physician practices since a higher percentage of doctors coming out of school or residency are either joining large systems or existing practices. The San Diego County medical-office market saw net absorption of 106,986 square feet over the past 12 months, which represents approximately 10% of the county's available space being absorbed, and overall vacancy is now down to 6.8%.

We spoke with Ross about where doctors are locating in this market, why the submarkets with the lowest medical-office vacancy rates are so low and which submarkets need more medical-office space.

GlobeSt.com: Where are the most doctors located in San Diego?

Ross: With four hospitals, three of them within a half-mile radius, the UTC submarket has by far the highest concentration of physicians. It comprises more than 15% of the county's doctors, and only East County comes close because it has approximately four times the geographic footprint of the greater UTC submarket.

GlobeSt.com: Why are the submarkets with the lowest vacancy rates so low?

Ross: At 4.1% vacancy, Kearny Mesa has the lowest vacancy rate in the county, primarily a result of the steady growth Sharp HealthCare and Rady Children's Hospital are seeing. Meanwhile, literally no new multi-tenant inventory has been built in the last 10 years. The only medical building developed during that period was a 170,000-square-foot building on Copley Dr. East County and South County have the second- and third-lowest vacancy rates at 5.0% and 5.7%, respectively. They have both experienced a significant increase in insured population—particularly from 2014 to 2016, following the implementation of the Affordable Care Act—and again, almost no new product is coming online. The inventory of medical buildings in South and East County has only increased about 10% over the past 10 years in each of these submarkets, but the number of insured residents and the overall demand for healthcare has increased by a much greater margin.

GlobeSt.com: Where is there a need for more medical-office space, and what type?

Ross: We need more medical space, specifically outpatient and clinical facilities, everywhere except the the SR-78 Corridor from Oceanside out to Escondido. Vacancy is declining and rents are rising everywhere. San Diego is the second most-expensive market in the country for healthcare providers, yet there is disparity between physician reimbursement rates in our community as compared to other similar counties with high cost of living and doing business. The development of more medical property is a win-win for everyone: residents gain more convenient access to care and better facilities, developers have the ability to add high-quality assets to their portfolios and some of the upward pressure on physicians' occupancy costs is better kept in line with where it should be.

GlobeSt.com: In the areas with the highest vacancy rates, why is this space vacant?

Ross: The entire 78 Corridor has had a disproportionately high amount of new medical office development, mainly due to its availability of developable land that does not exist in most other areas of the county. This has led to a large increase in inventory, and occupancy levels have not been able to keep pace given the lower demand for space in this area compared to coastal submarkets. It has taken several years for things to stabilize, but the area has steadily rebounded, and vacancy is now hovering around 10%.

Instant Insights /

Where the Doctors Are in San Diego

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