Class-B Medical Office Rents Hit All-Time Highs in San Diego
The tight medical office market in San Diego is fueling leasing activity for class-B product, pushing rents to new records.
“Class-A space is incredibly tight right now, so class B medical office buildings are reaping the benefits, filling vacancy at all-time-high rents,” Chris Ross, EVP at JLL, tells GlobeSt.com. “Conveniently located buildings continue to attract the most activity across all classes, and fully improved space is usually the first to go.”
The growth and expansion of the medical office sector in San Diego isn’t all that surprising. Ross says the market is a hotspot for quality healthcare and San Diego residents place a high value on a healthy lifestyle. “We have excellent healthcare in San Diego, with top-rated hospitals and health systems, world-class clinical and pharmaceutical research, progressive development and implementation of healthcare technology, and highly skilled physicians,” he says. “We have a dynamic population that generally values its health, more so than the average community, and much of our population has good insurance that allows our healthcare providers to succeed and grow.”
While the expansion of the healthcare industry is fueling medical office leasing activity, rising construction costs are actually hindering activity. To compensate, landlords are increasing tenants improvement allowances on older properties. “The elevated rents are making it easier for owners to do so,” says Ross.
In addition to increasing demand for class-B medical office, users are also looking more and more at retail locations. “More healthcare tenants will be looking at retail sites in 2019 and beyond as retail goes through a major transformation in the years ahead, both because of their convenient settings and the more affordable terms than we have seen historically,” says Ross. “That sector is already dealing with significant consolidation and uncertainty—mainly due to the pressures imposed by e-commerce—and that is without the added pressure of any economic slowdown.”
This is a new trend in San Diego, but other markets have already seen medical office users absorb retail space. Ross expects a similar trend in San Diego. “The retail sector’s interest in more diversified tenant mixes and new services—particularly in healthcare—has only just begun,” he says. “The fact that millennial will overtake baby boomers in population in 2019 lends well to retail and newer and nicer facilities, as the millennials value convenience and the experience in everything they do, including visits to the doctor.”