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LOS ANGELES-Medical office buildings here outperform those in the rest of the country and also outperform general purpose office space in L.A., a new study says. According to the report by Marcus & Millichap, Los Angeles metro office vacancy is currently 8.7%, while traditional office vacancy in the metro is 11.5%. By comparison, the US averages for medical office and traditional office vacancy rates were 11.7% and 15.2%, respectively, in the latest period measured.

The study points out that medical office buildings and other healthcare-related properties could continue to do well, despite the recession, because “healthcare reform bodes well for the sector’s future performance. The report contrasts the outlook for the healthcare industry with that of other industries. Nonfarm employment in Los Angeles is forecast to weaken further in 2009, but demand for medical office space “will get a boost from growth in the education and health services industry, where employers are expected to add almost 10,000 positions by year end,” according to the report. The US as a whole is also projected to record growth in education and health services employment this year.

Medical office space in Los Angeles might also benefit more from the national healthcare reform efforts to broaden medical coverage and access. Los Angeles has one of the highest uninsured rates in the nation, Marcus & Millichap points out, with more than 25% of the population lacking health coverage, compared to 16% nationally.

The study shows that, with 75% of the L.A. metro‘s population covered, there is approximately 4.2 square feet of medical office space per insured individual. An increasein the insured rate to even 90% of the population by 2013 would require roughly eight million square feet of additional medical office space, using the current ratio.

Other drivers of medical office demand in the L.A. area will be the aging population and, possibly, California Gov. Arnold Schwarzenegger’s $32 million initiative to reduce the shortage of critical healthcare workers in California.

On the construction front, the report shows that rising costs for land and construction “typically have curtailed excessive medical office building in the metro,” with deliveries of neew space averaging less than 1% of inventory annually. Nonetheless, completions reached 2.6% of total stock last year, as developers responded to surging demand. The outlook now is for building to slow for at least some time, however, with completions project to be less than 300,000 square feet this year after roughly 820,000 square feet of new medical office space was delivered in 2008.

Among the projects now under way in Los Angeles is a 65,000-square-foot medical office building called the Loker Medical Arts Pavilion. The Rendina Cos., in conjunction with California Hospital Medical Center, is developing the new building on the campus of the California Hospital Medical Center, a Catholic Healthcare West Hospital, on the corner of Venice Boulevard and Grand Avenue.In its vacancy outlook for L.A., Marcus & Millichap projects that the rate will increase, finishing the year at 9%, still well below the US average. Asking rents are forecast to decline 3.7% to $32.00 per square foot in 2009, after rising an average of 5.7% annually over the past eight years.

The number of medical office building sales slowed by roughly 20% in L.A. in 2008 while rising by 17% nationally. Cap rates have increased over the last year and are currently averagingabove 7.3%, with prices moderating to a median of around $200 per square foot.

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