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San Diego Medical/Office Vacancy Hits Lowest Point Since 2006, Occupancy Still Rising

Key Findings from Cushman & Wakefield Healthcare Advisory Practice Report

San Diego County CA— Cushman & Wakefield’s Healthcare Advisory Practice in San Diego has released its second quarter 2019 medical office market report for the San Diego region. Below are the key findings from this report plus local expert commentary:

Vacancy Continues To Tighten, Ask Rents Inch Upward

San Diego’s overall countywide medical office vacancy stood at just 6.0% at mid-year 2019, while net absorption was a positive 23,000 square feet (sf) in the second quarter. With virtually equivalent growth in the first two quarters, San Diego’s medical office market occupancy has gained 40,000 sf year-to-date.

Joe Zurek, Senior Associate with Cushman & Wakefield’s Healthcare Advisory Practice in San Diego, said “Now at just 6.0%, countywide medical office vacancy has reached its lowest point since 2006, and is 800 basis points below its peak vacancy of 14.0% a decade ago at the end of the Great Recession.” He added, “The effect of the declining vacancy can be felt across the county, with every submarket entering into its third consecutive quarter of single digit vacancy.”

The countywide average asking rent of $3.10 per square foot full service increased a marginal 0.3% from last quarter while is up 1.3% (or $0.04) from a year ago. The report notes, however, that some submarkets have seen some decline due to the fact their remaining vacancy is increasingly composed of lower quality spaces.

Zurek pointed out, “North County and certain Central Suburban submarkets are two such examples where the remaining vacancy is increasingly composed of lower quality spaces.”

On/Off-Campus Rent Spread Explained
The spread between on-campus and off-campus rent continues to widen. This spread can also partially be understood as a reflection of the age and quality of the inventories.

Zurek explains, “Providers are increasingly focused on reducing costs by moving treatments from an inpatient, on-campus setting to an outpatient, off-campus setting. This is fueling the demand for new off-campus construction. As the healthcare industry continuum of care continues to incentivize more treatments off-campus and closer to the patient base, look for these trends to continue.”

Outlook
Zurek projects, “As healthcare providers begin to be priced out of popular, high priced submarkets, they are finding solutions in historically affordable neighboring submarkets. For example, in the Sorrento Mesa submarket, we are seeing doctors initially interested in areas such as La Jolla and Del Mar locate there to remain close to their target patient base but at around a 50% rent discount. Another example is Carlsbad and Encinitas, in which local practices are now considering Oceanside and San Marcos as more affordable alternatives. And so as this trend continues, look for properties in these higher-priced submarkets to begin to compete more aggressively to win back these tenants.”

Zurek concludes, “Continued low vacancy and few speculative projects in the pipeline could provide opportunities for developers to build new and or convert traditional office into medical office in certain submarkets.”

Click link below to download Q2 2019 market report

San Diego Medical Office Report Q2 2019