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Friday, Feb 3, 2023

Medical Office Market Strong

Add medical office to the list of commercial real estate property that’s chugging along during the COVID-19 pandemic.

“All things considered, physician practices are hanging tough, not giving space back, not putting space on the market that we’re seeing in other practices,” said Chris Ross, an executive vice president with the commercial real estate brokerage JLL.

“The bottom line is, there are still practices that are growing. There are practices that are opening locations. They’re seeing COVID more in the rear view mirror,” Ross said.

The outlook was bleak when the pandemic first hit in March as medical practices closed their doors as part of the statewide lockdown.

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Even when the reopened, many found that patients were reluctant to return for fear of contracting the virus.

Those concerns have eased as the year of the pandemic comes to a close.

That’s not to say that all has returned to normal.

“I would bet that in primary care, a lot of people are putting off basic but much needed care,” Ross said.

With COVID cases spiking, hospitals also have put non-emergency cases on hold.

In a way, that’s added to the demand for medical office space as physicians look to provide more of their services in outpatient settings.

Rising Rents

JLL in its third quarter report on the medical office segment noted that asking rents were on the rise in San Diego County – up 5.4% year-over-year with many physicians reporting that their revenue was returning to pre-COVID levels.

At the end of the quarter, the average asking rate was $3.67 per square foot, up from $3.49 per square foot a year ago.

The highest asking rents were in the North County coastal submarkets, averaging $4.79 per square foot, just a shade above what they were a year ago at $4.74 a square foot, according to JLL.

“Providers are generally licking their wounds but generally getting back to pre-COVID plans and eyeing growth in 2021,” JLL reported.

Vacancy remained fairly flat in the quarter with the net absorption of 68,428 square feet of medical office space – meaning that much space was newly occupied verses space that was vacated.

Another commercial brokerage, Cushman & Wakefield, in its third quarter report on the medical office market wrote that “vacancy rates for every submarket remained in the single digits for the eighth consecutive quarter.”

Cushman & Wakefield reported that the countywide vacancy rate was 5.8% at the end of the third quarter.

New Space

A big chunk of the newly occupied office space came with the completion of the 90,000 square-foot Kaiser Permanente medical building in Clairemont that replaced an existing building on the same site that’s being demolished.

Palomar Health also opened a second medical office building of 80,064 square feet in Escondido with 27,000 square-feet leased before it was even finished.

JLL reported that a substantial number of new medical office leases were pending at the end of the third quarter – so many that JLL predicted that the vacancy rate could drop to 5% or less within the next six to 12 months. 


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