Widening Spread Between On- and Off-Campus Medical Office

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The spread between on- and off-campus medical office product continues to widen in San Diego, according to research from Cushman & Wakefield. The spread is the result of the age and quality of available product. Many healthcare providers are looking for opportunities to move treatments to an off-campus setting, but there is limited availability of product to meet these needs.

“Healthcare providers are increasingly focused on reducing the cost of care for both themselves and their patients by moving treatments from an inpatient, on-campus setting to an outpatient, off-campus setting, which is fueling demand for off-campus construction,” Joe Zurek, senior associate of the healthcare advisory practice group at Cushman & Wakefield, tells GlobeSt.com. “Although the highest rents are found at these new and often higher-end off-campus locations, the cost savings in terms of regulatory compliance, patient-monitoring, and facility overhead realized by moving off-campus more than justifies the rent, while also providing a premier services environment.”

Zurek expects this trend to continue as more healthcare providers look for spaces to move outpatient treatments. “As the healthcare industry’s continuum of care continues to incentivize more treatments off-campus and closer to the patient base, look for this demand trend to continue,” he says.

While there is a dearth of supply, rents—currently at an average of $3.10 per square foot—is only high enough to justify new construction in certain markets. As a result, there is only limited new supply coming to market. “The cost of new construction will require +/-$3.00 NNN rents, which are only achievable in certain markets,” says Zurek. “Even then, the pool of tenants that are willing and able to pay that kind of rent is limited, making it difficult to secure enough pre-leasing to break ground on new construction. The only significant new construction we’re really seeing is build-to-suit (BTS) for the health systems, frequently done internally with the intent to own and occupy the entire building themselves.”

The supply-demand imbalance, however, will continue to drive vacancy rates down and rental rates up. “The lack of available new inventory on the open leasing market has naturally contributed to the steadily declining vacancies in San Diego which at some point, driven by demand, will result in a need for new inventory—both on a build-to-suit as well as speculative basis,” adds Zurek. “However, we don’t foresee substantial amounts of speculative construction to be added to our supply in the near term.”