Flight-To-Built-Out Quietly Becomes Major Factor for Medical Office in San Diego
San Diego's Class A medical office buildings' asking rents continue to rise, according to a new Q4 report from JLL.
Vacancy among Class A assets compressed to 4%, and, for the first time, average asking rents surpassed $5 per square foot gross in San Diego County.
"While 'flight-to-quality' remains a trend, the real underlying shift is the 'flight-to-built-out-space,' according to Ben Schiesl, vice president of JLL.
He said this is especially true among San Diego medical office tenants in the 1,800- to 4,000-square-foot range, who make up the bulk of leasing demand.
"With rising construction costs, permitting delays, and a limited supply of move-in-ready clinical suites, tenants now prioritize space that is ready or nearly ready for immediate occupancy," Schiesl said.
As a result, Class A owners, who have the capital to fund speculative builds or offer turnkey solutions, are seeing vacancy rates tighten further, while Class B and C properties experience rising vacancy, driven more by a lack of investment at the suite level than by building quality.
"Owners who can deliver high-quality clinical space or provide substantial tenant improvement allowances will be best positioned to capture demand in today's market," Schiesl said.
Over the next several years, new San Diego medical office development and adaptive reuse activity are anticipated in Kearny Mesa and San Marcos.
In Q4, the Uptown/Hillcrest and I-15 Corridor submarkets recorded the sharpest occupancy losses, with 12-month net negative absorption totaling -28,910 square feet and -31,559 square feet, respectively. In contrast, vacancy declined year-over-year in Kearny Mesa from 6.5% to 4.5% and the levels in Escondido/San Marcos went from 5.8% to 3.6%, reflecting strengthening overall market fundamentals.
Until a meaningful reversion in construction costs and permitting duration occurs, lease renewals will remain the favored option for most medical tenants – even among those seeking expansion opportunities, according to Patrick Ashton, research manager at JLL.
Source: GlobeSt/ALM