Demand for medical office space intensified in the first quarter of 2022, helping to drive up rents, according to a report from JLL Healthcare Practice Group.
That’s good news for property owners with office space in neighborhoods where zoning would allow medical practices but troubling for medical professionals, who might be looking to expand.
There just isn’t that much space available, said Kelly Moriarty, co-director of JLL San Diego’s Health Care Practice Group.
Little New Construction
JLL reported that leasing activity in the first quarter of the year outpaced new construction and existing supply, with the vacancy rate for medical office space dropping to 5.8% from 7.8% a year ago.
For top-of-the-line Class A space, the vacancy rate was 3.8% at the close of the first quarter, according to JLL.
The outlook is unlikely to change in the near future. JLL reported that the pipeline of medical office space under construction was “extremely limited” at 97,000 square feet, which the firm said was less than 1% of the county’s today inventory of medical office space.
From 2013 to 2022, the amount of newly built office space has fallen an average of 26,000 square feet per year.
During that same period, JLL reported that 168,619 square feet of new office space was delivered compared to 337,293 square feet from 2006 to 2012.
Moriarty said that the Interstate 15 corridor – Oceanside, Vista, Escondido and San Marcos — have the highest availability of medical office space.
Meanwhile, JLL reported that “new development remains curbed by inflated construction costs and lack of available land.”
Where space is available, medical practitioners may find themselves competing with life science companies.
“We were seeing life science acquiring buildings that had medical office zoning,” Moriarty said.
“The net result is that it takes more of the already limited supply of medically zoned buildings in the county without any existing or future development to help offset the loss,” Moriarty said.
All of this is pushing up rents – a trend that shows no sign of easing, according to JLL.
The average asking rent at the end of the first quarter was $3.95 per square, a 6.5% increase from the first quarter of 2021, with the asking rent for Class A space reaching $4.64 per square foot.
“What we see in the medical office market, contrary to other sectors, there’s always going to be demand for health care, even during a recession,” Moriarty said.
In the early stages of the COVID-19 pandemic in 2020, the outlook was bleak for medical practitioners who were forced to close down, but the market has since come back to pre-pandemic levels.
“We’ve seen the full recovery and practices getting back to 100% capacity as well as seeing practices experiencing some of their best years and months ever,” Moriarty said. “Through the end of this year, I don’t see any significant change in that trend.”
A change that Moriarty also sees continuing is a preference by medical practitioners to open offices away from hospital campuses, which had historically been their top choice.
In 2022, practitioners simply want to be closer to the patients they serve, Moriarty said.