San Diego Business Journal

Healing Properties

PROPERTY: Medical Office Locations Involve Many Considerations By Lou Hirsh Monday, August 27, 2012
Stephen Dok, vice president in the San Diego health care division of brokerage firm Voit Real Estate Services, stands in front of the Scripps Mercy Hospital San Diego at 550 Washington St. Dok says that hospital-adjacent medical buildings are the preferred venue for many doctors, but that providers can expect to pay 15 percent to 20 percent premiums in rents for locations next to a hospital.

Stephen Dok, vice president in the San Diego health care division of brokerage firm Voit Real Estate Services, stands in front of the Scripps Mercy Hospital San Diego at 550 Washington St. Dok says that hospital-adjacent medical buildings are the preferred venue for many doctors, but that providers can expect to pay 15 percent to 20 percent premiums in rents for locations next to a hospital.

Parking Is a Priority

“Our patients were complaining about the parking, so one of our biggest priorities was getting more parking,” said MedDerm CEO Christian Hoag, whose wife is the practice’s lead dermatologist, Dr. Michelle T. Pelle.

After much searching and waiting, operators came across a larger leased space not far from the practice’s current site, in the Village Hillcrest medical building on Washington Street, where it will soon relocate its three practitioners and eight support staffers.

The practice was able to get a bigger space on generally better terms, including a lower per-square-foot leasing cost compared with its current home. More importantly, it will retain its proximity to other practices and two major Hillcrest hospitals that provide key patient referrals: Scripps Mercy Hospital San Diego and UC San Diego Medical Center.

“A lot of the medical staff at Scripps Mercy are also our patients,” Hoag said.

Travis Ives, a senior associate in the Healthcare Practice Group of Cushman & Wakefield in San Diego, said federal health insurance reforms and other changes in care delivery over the past several years have steadily altered the real estate requirements of practices.

The latest reforms, recently upheld by the Supreme Court, could accelerate the trend of larger group practices housed in larger facilities, as smaller practices either cease operating or decide to join up with larger care providers.

‘Opposite Agendas’

Some of those larger practices will still want to be adjacent to hospitals, but others — for instance, providers of orthopedic and other outpatient services — will prefer to locate elsewhere to be closer to customers. In fact, hospitals themselves increasingly are setting up off-campus outpatient facilities emphasizing preventive care, in part to lessen traffic in emergency rooms.

“They really have opposite agendas,” Ives said. “The private practitioners depend on referrals and want to be located as close to the big hospitals as possible. The big hospitals are looking to establish links with the neighborhoods where their patients live, so their move is toward satellite centers away from their main campuses.”

Cushman & Wakefield’s latest quarterly medical office report noted that local health care property vacancy rates range from 6.6 percent in San Diego’s high-demand midcity submarket, to 15.3 percent in North County.

Rent costs generally reflect supply and demand dynamics. Average rents for leases completed in the first half of 2012 ranged from $2.25 per square foot in East County, to $2.77 in South Bay, $2.97 in North County, $2.98 in the I-15 corridor and $3.22 in midcity San Diego.

Cushman & Wakefield noted that the county’s overall medical property vacancy rate fell during the past year, from 9.8 percent to 9.3 percent, and is expected to continue declining in the coming year. Direct asking rents actually dropped 1.7 percent in the past year, to a countywide average of $2.78 per square foot, but will likely hold steady in the coming year, since the growth of new leasable space will remain slow.

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