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3/16/23
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This report was provided by real estate services firm JLL
Overview
• The San Diego medical office market posted its strongest quarter of the year in Q4 with 122.1k sf of net absorption. Most submarkets saw over 10k sf of net absorption, and none gave back more than 2.3k sf of space. The most leasing activity came from the UTC and Escondido areas.
• On the year, San Diego County MOBs posted just shy of 174k sf of aggregate net absorption. Despite above-average deliveries in 2020 and 2021 relative to the last 10 years, San Diego’s vacancy rate has fallen to the lowest mark in 15 years at 5.0% -- down 70 basis points from a year prior and approximately 280 basis points below the
national average of 7.8%.
• Class A vacancy is currently 4.3% countywide, but available medical office space has become more challenging to find regardless of the tenant’s budget and other preferences, as even Class C vacancy is down to 5.1%, dipping below that of Class B at 5.5%.
• San Diego’s average asking rental rate increased another 3.4% year-over-year to close at $3.98 FSG, a more modest increase from the 5.5% posted a year prior. The average asking rate among Class A medical buildings is up to $4.70 FSG, and Class B is currently $3.94 FSG.
Forecast
While the U.S. population is projected to grow just 5% overall in the next ten years, the 80+ population is forecasted to grow 49.7% during that period, and the population ages 70-79 is projected to increase by 26%. These statistics alone tell us that demand for medical space will persist for the foreseeable future, especially given that any significant changes in our healthcare system (i.e. possible counteracting market forces) tend to take place at a relatively slow pace. In 2022, CMS released a report stating 5.1% projected annual growth in national healthcare spending for 2021-2030. It is expected to reach $6.8 trillion by 2030, 30% of U.S. GDP. That said, this industry still has its share of negative headlines, and providers are expected to cut back on capital projects in 2023. One large west-coast-based health system just reported a $4.5 billion net loss in 2022. Venture capital is the tightest it has been in years. Physicians and health systems are not immune to the effects of inflation, rising interest rates, high construction costs and economic headwinds. They are dealing with constant financial and other obstacles; nonetheless, healthcare real estate is still expected to fare well in 2023.
Key Stats and Trends:
• Absorption of medical space continues to outpace new deliveries
• MOB development remains curbed by inflated construction costs, lack of available land and other barriers to entry
• From 2014-2022, the average annual deliveries has been approximately half of that of 2006-2013
• From 2014-2022, deliveries have fallen short of net demand by an average of 48k sf per year
• Ground-up MOB development is currently just 10k sf in total; however, supply relief will
likely come from a handful of slated conversion projects in 2023 and 2024
MOB investment market
The current state of the capital markets is having its effect on healthcare property values, but it is difficult to assess to what extent. Most of the MOBs trading hands are value-add, owner-user, office building conversions, or coupon-clipper, long-term-hold 1031 investments at pre-2022 pricing. Very few sales are occurring among multi-tenant medical buildings and other traditional, stabilized assets, as the cost of debt is too high to justify a sale at the price it would take for an owner to sell. The outlook for healthcare real estate is still very strong, so any decline in values is expected to be short-lived.
Medical Office Submarkets and Hospitals
Scripps Health
1. Scripps Memorial Hospital Encinitas
2. Scripps Green Hospital
3. Scripps Memorial Hospital La Jolla/
Prebys Cardiovascular Institute
4. Scripps Mercy Hospital San Diego
5. Scripps Mercy Hospital Chula Vista
Sharp HealthCare
6. Scripps Memorial Hospital/Sharp Mary Birch Hospital
7. Sharp Grossmont Hospital
8. Sharp Coronado Hospital
9. Sharp Chula Vista Medical Center
UC San Diego Health
10. Jacobs Medical Center/Sulpizio Cardiovascular Center
11. UC San Diego Medical Center Palomar Health
12. Palomar Medical Center Escondido
13. Pomerado Medical Center Poway
Rady Children’s Hospital
14. Rady Children’s Hospital Prime Healthcare
15. Alvarado Hospital Medical Center
16. Paradise Valley Hospital
Tri-City Medical Center
17. Tri-City Medical Center Kaiser Permanente
18. Kaiser Permanente Zion Medical Center
19. Kaiser Permanente San Diego Medical Center
VA San Diego Healthcare System
20. VA San Diego Healthcare System
Naval Medical Center San Diego
21. Naval Medical Center San Diego
This report was prepared and provided by JLL Healthcare Practice Group Healthcare Real Estate Advisory | San Diego
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