Nov 18, 2015 - That is not to say providers do not have plenty of challenges. ... currently 4.7%, lowest in the county â
Q4
2015
Medical Office Report San Diego County
Healthcare Practice Group Sales ▪ Leases ▪ Renewals ▪ Investments
Medical Office Report San Diego County
JLL Healthcare Practice Group
Healthcare Real Estate Advisory | San Diego Paul Braun Managing Director
858-410-6388
[email protected]
sdmedicalrealestate.com
Chris Ross Vice President
858-410-6377
[email protected]
Kelly Moriarty Associate
858-410-6359
[email protected]
skingMarket Rates conditions and trends
Vacancy
$27.94 psf
7.8 %
Asking Rates
Medical office leasing and sale activity remains steady throughout most areas of the county, the Southwest region and the U.S. With improved employment rates and other economic conditions comes a generally better insured population, a higher percentage of patients seeking preventative medicine and elective procedures and other trends that have resulted in improved revenue for many health practitioners. As a result, more space is being absorbed. AverageThatclass ratedo not have plenty of challenges. In fact, many physicians’ net is notA to asking say providers incomesgross are down and have decided to retire or join a larger group to get away from the Full service grind of practice ownership. But the fundamentals that affect real estate demand are strong: Average asking rate physicians and hospitals continue to consolidate or formclass strategicApartnerships, and as a whole they are expanding programs, servicesFull and geographic reach. service gross
$27.94 psf
Countywide direct vacancy
Absorption
$25.12 psfDemand trend: Tempe submarket204,183 and trend: Tempe submarket $25.12 Vacancy psf Vacanc +22.1% Asking Rates 10.5% sking Rates +22.1% 10. 2.4 % $27.94 psf +7.1% psf $27.94 +7.1% 22.2% 22. $25.12 psf bsorption 259,018 4.5% Vacanc $25.12 psf Absorption 4.5 Vacancy 567,218 sf +22.1% 10. Construction 567,218 sf +22.1% 10.5% Const +7.1% 2.4 msf 11.5% 22. +7.1% 2.4 11.5% 22.2% Vacancy continues its gradual decline and now sits at 7.8%, down fairly significantly from 9.7% a year ago, with only two submarkets (Oceanside/Vista and Escondido/San Marcos) over 10%. Only ten medical buildings in the county contain over 20,000 square feet of total Phoenixavailable classspace. A asking rate
Forty-nine (49) of the 398 buildings in the county that are designated as “medical office” by JLL Healthcare Practice Group are considered Class A. Vacancy theserate buildings is Phoenix class Aamong asking 6.6% - well below the five-year average of 11.1%. The average time on the market for this vacancy is currently 12.1 months, down from the five-year average of 18.3 months. Class B medical buildings are continuing their downward trend in vacancy (currently 7.9%)
2015 net absorption (s.f.) 64,527 s.f. (Q4 2015)
Rents
Phoenixandclass A incline askingin asking rate rents ($2.56/SF full service). Class C vacancy isTempe gradual currentlyvacancy above 5- and 10-year averages but remains in the single digits at 9.1%. Class C average of any Phoenix submarket Lowest asking rent is currently $1.91/SF – a hair above the 5-year average of $1.86. Phoenix class A asking rate
Increase in Tempe overall Average classsince A asking asking rates ‘12 rate Full service gross
Phoenix class A asking rate
Average class A asking rate Full service gross
12-month rent growth $2.70 FS Average Asking
Phoenix vacancyConstruction Increase in Tempe overall asking rates since ‘12
Phoenix
Phoenix class A asking rate Total under construction (s.f.) Tempe Class A vacancy
Tempe C
Net absorption (“12-14’) Phoenix class A asking rate Average net absorption: 47,268 sf per quarter Net absorption (“12-14’) Tempe vacancy Phoenix class A asking rate Average net absorption: 47,268 Lowestsfofper anyquarter Phoenix submarket
Of Phoenix absorption (‘12-14’) Increase in Tempe overall sdmedicalrealestate.com asking rates since ‘12
Tempe v Lowest o
Increase in Tempe overall Under construction in Tempe asking rates since ‘12 Out of 3.6 msf in Phoenix overall
Of Phoenix absorption (‘12-14’) Phoenix vacancy
Tempe v Lowest o
Phoenix Under co Out of 3.
$2.70 FS
-200,000
Netasking Absorption vs.ByDirect Vacancy Direct rental ratessubmarket
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
$2.25 $2.00
2015
0%
$2.50
2014
2%
$2.75
2013
4%
$2.96
$3.00
2012
6%
$3.25
2011
10%
$3.39
2010
12%
Class B Direct Asking Rent
$3.50
2009
14%
Class A Direct Asking Rent
2008
Other
South County
East County
Uptown/Hillcrest
La Jolla/UTC/Sorrento Kearny Mesa/Mission Valley
Class A and B direct asking rents*
2007
-200,000
I-15 Corridor
8%
North County Coastal
100,000
Escondido/San Marcos
16%
Oceanside/Vista
$4.00 $3.64 $3.49 $3.50 $3.01 Net absorption Direct Vacancy $2.79 $2.70 $3.00 $2.47 $2.44 $2.21 $2.18 $2.11 $2.50 400,000 $2.00 $1.50 300,000 $1.00 $0.50 200,000 $0.00
-100,000
0%
Class A and B Direct Asking Rents*
Net absorption vs. direct vacancy
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
2006
Pri
Average asking rent
*Asking rents weighted by available sf and grossed to FSG
Class A and B direct asking rents* Class A Direct Asking Rent Forecast
Class B Direct Asking Rent $3.39
Health care providers are doing a good job educating $3.50
consumers about the importance of regular checkups, $3.25
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
wellness, healthy diets, exercise, new medical technology $2.96 $3.00 and other advancements in medicine, and other important $2.75 information pertaining to health and care. San Diego in particular has some of the nation’s best physicians and $2.50 hospitals, and our county will continue to benefit from that – $2.25 as will the real estate in which these providers practice. New $2.00 construction has remained remarkably limited, but this is bound to change as demand persists and rental rates reach unchartered territory. *Asking rents weighted by available sf and grossed to FSG
San Diego Submarkets - Tips and Trends Escondido/San Marcos Palomar Health has continued the migration of most of its services out of downtown Escondido and most recently announced that it will be closing its downtown ER on March 14. The downtown area is expected to see increased demand for urgent care and primary care services, while more specialists are continuing to look at their office space alternatives further west. Oceanside / Vista The recent announcement of the strategic partnership between Tri-City Medical Center and UC San Diego Health will only mean good things for the continued recovery of the area’s medical office market. It will result in new providers and services entering into the area and absorbing space, beginning
with UCSD’s pending lease of the entire third floor (19,000 SF) of Tri-City’s new campus medical building, which will bring the project to 67% leased. North County Coastal Vacancy remains very tight from Carmel Valley up to Carlsbad – currently 4.7%, lowest in the county – with limited development in the pipeline. Rents and prices in this area should continue to steadily rise, which should soon trigger new development and/or conversion of office or retail buildings to medical office. I-15 corridor Even though leasing activity remains limited in the greater Rancho Bernardo/4S Ranch/Poway area, the strong demographics and stable base of physicians keep its inventory of MOBs in good health. There is no medical office development in the pipeline, vacancy remains tight and rental rates and prices are gradually increasing. La Jolla / UTC / Sorrento Most medical buildings in the UTC area raised asking rents in 2015, some as much as 20%, which may be having an impact on the feasibility of prospective relocations or expansions by many providers. We saw similar dramatic lifts in rents in this area in 2006-2007, followed (perhaps as a result) by very limited leasing activity in 2007-2008… so it will be interesting to see how much space is absorbed in 2016. Kearny Mesa / Mission Valley Sharp HealthCare decided to move administrative services into all of the remaining vacancy at 7930 Frost Street, while some
Class A and B direct vacancy rates ClassRates A Direct -Vacancy Class B Direct Vacancy Vacancy By Submarket
Class A and B Direct Vacancy Rates
Class A and B direct vacancy rates
Demand
Quarterly leasing Vacancy rates- By submarket 2015 net absorption
Other2015
106.009 SF 204,183 SF
Other
South County
East County
Uptown/Hillcrest
La La Jolla/UTC/Sorrento Jolla/UTC/Sorrento Kearny Mesa/Mission Kearny Mesa/Mission Valley Valley
I-15 Corridor
North County Coastal North County Coastal
Escondido/San Marcos
Oceanside/Vista
Pricing
20.0% 17.3% 18.0% 12-mo. rent % change 2.4% 16.0% / Hillcrest Uptown 14.0% $2.70 FS 10.4% Average asking rent 12.0% Over theasking past 12rental months, 38,000 SF was absorbed9.8% in the Hillcrest Direct ratesBy submarket 10.0% 7.7% 7.6% 6.7% submarket, dropping vacancy from 12.7% to 7.6% and lifting asking 6.2% 8.0% 5.4% 4.7% $4.00 $3.64 $3.49 rents of 6.0%from $2.54/SF to $2.70/SF full service. With the inventory3.1% $3.50having now recovered and with a$3.01 4.0% MOBs generally even spread $2.79 $2.70 2.0% $3.00 Net absorption vacancy $2.44 of0.0% limited vacancy throughoutvs. thedirect area, market conditions$2.47 should $2.21 $2.18 $2.11 $2.50 remain stable in 2016. $2.00 Net absorption Direct Vacancy South $1.50County $1.00 400,000 Over 20,000 SF was absorbed in the greater Chula Vista area in $0.50 2015, resulting in a drop in vacancy from 9.2% to 7.7% and a rise $0.00 300,000
0
Other
South County
East County
Uptown/Hillcrest
100,000
I-15 Corridor
Escondido/San Marcos
in asking rents from $2.35/SF to $2.47/SF. We expect similar trends in 2016 as 200,000 providers strategize and expand services to care for the area’s growing and increasingly insured population. Oceanside/Vista
Other
South County
East County
Uptown/Hillcrest
La Jolla/UTC/Sorrento Kearny Mesa/Mission Valley
I-15 Corridor
North County Coastal
Escondido/San Marcos
Oceanside/Vista
of their own physicians along with other Sharp-affiliated physicians Vacancy rates-into Bymuch submarket have moved of the vacancy at Sharp’s other two buildings at 8008 and 8010 Frost Street. These changes, combined 20.0% 17.3% of outpatient facilities by Rady Children’s with the expansion 18.0% Hospital and some of their affiliated physicians, resulted in a nearly 16.0% 14.0% 50% drop in the submarket’s vacancy in 2015. 12.0% 10.4% 9.8% East County 10.0% 7.7% 7.6% 6.2% 6.7% 5.4% 8.0% East County gave back 4.7% 12,000 SF in 2015, with vacancy still sitting 6.0% 3.1% at just under 10% and rents completely flat. It appears (per CoStar 4.0% 2.0% and JLL Healthcare Practice Group’s research) that no new lease 0.0% over 3,500 SF was signed in 2015; but we would be surprised if history repeats itself in 2016 since the physician base in the area is simply too large to remain frozen.
51,588 SF
South County2014
Under construction
8.0%
East County2013
Total vacancy rate
Uptown/Hillcrest2012
2015
2014
2013
2012
2011
2010
2009
6.6%
0%
2008
5% 2007
7.0%
2006
10%
La 2010 Jolla/UTC/Sorrento Kearny Mesa/Mission2011 Valley
15%
I-15 Corridor2009
20%
2008
25%
North County Coastal
30%
Escondido/San2007 Marcos
35%
30% 20.0% 17.3% 25% 18.0% 16.0% 20% 14.0% 15% 12.0% 10.4% 9.8% 10.0% 7.7% 7.0%Last Qt 10% 7.6% Key market indicators 6.2% 6.7% 5.4% 8.0% Change 4.7% 5% 6.0% 6.6% 3.1% Supply 11,970,305 SF 4.0% 0% 2.0% 0.0% Total availability 1,182,000 SF / 10.5% 2006
Class B Direct Vacancy
Supply Oceanside/Vista
Class A Direct Vacancy
35% Vacancy rates- By submarket
Direct Asking Rental - By Submarket Direct asking rental rates-Rates By submarket -100,000
Other
uth County
ast County
wn/Hillcrest
La C/Sorrento esa/Mission lley
-15 Corridor
nty Coastal
ondido/San Marcos
nside/Vista
$3.49
$3.01 2006 2007 2011 2012 2013 2014 2 $2.792008 2009 2010 $2.70 $2.47 $2.44 $2.21 $2.18 $2.11
$3.00 $2.75 $2.50
Other
South County
Class B Direct Asking R
East County
La Jolla/UTC/Sorrento Kearny Mesa/Mission Valley
$3.25
I-15 Corridor
$3.50
North County Coastal
Class A Direct Asking Rent
Uptown/Hillcrest
Class A and B direct asking rents* Escondido/San Marcos
$4.00 $3.64 $3.49 $3.50 $3.01 $2.79 $2.70 $3.00 $2.47 $2.44 $2.18 $2.11 $2.50 $2.21 $2.00 $1.50 $1.00 $0.50 $0.00 sdmedicalrealestate.com
$3.64
-200,000
Oceanside/Vista
Direct asking rental rates- By submarket
$4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00
News and updates
5
MOB sale transactions countywide over $15M in 2015 *
12
Planned or proposed MOBs in San Diego County over 15,000 SF **
UC San Diego Health and the Tri-City Healthcare District have entered into a long-term strategic affiliation to expand the depth and breadth of specialized medical and surgical services in North County. Tri-City Healthcare District will continue to operate as a District Medical Center and serve as the northern San Diego hub for the UC San Diego Health Care Network. Family Health Centers of San Diego continues to expand. In September, San Diego City Council unanimously approved a 25year ground lease of a city-owned lot in Barrio Logan for a proposed two-story 8,255-square-foot behavioral health facility. Scripps Health and Irvine Co. have opened the new Scripps Health Express in UTC, a retail health clinic within a large office complex known as The Plaza designed to offer convenient health and wellness services to the local daytime population. The clinic offers a variety of services on both a walk-in and by-appointment basis. In 2016, the Irvine Co. plans to open additional corporate clinics in partnership with Scripps. California Attorney General grants conditional approval for a hedge fund to invest and manage a nonprofit hospital in San Jose, California. The approval allows Blue Mountain Capital Management
14.4%
Countywide office (non MOB) vacancy (7.8% for medical office and 4.8% for retail) ***
to invest with an option to purchase the Daughter of Charity Health System, which would be renamed Verity Health System. In November President Obama signed legislation that will reduce reimbursements for new hospital-based outpatient facilities. Such facilities that are already in existence will continue to be paid at higher rates based on Centers for Medicare and Medicaid Services’ (CMS) outpatient prospective payment system (OPPS), but any new facilities will now be paid on par with non-hospitalbased facilities such as the Medicare physician fee schedule (PFS) or the ambulatory surgery center (ASC) payment system. * 5 MOB sale transactions countywide over $15M in 2015. In the past decade, there was only one other year in which more than three such sales were recorded (4 sales in 2013). ** 12 planned or proposed MOBs in San Diego County over 15,000 SF. Only one is slated to break ground in 2016, and two others are expected to break ground in 2017. *** 1 4.4% countywide office (non-medical office) vacancy compared to 7.8% for medical office and 4.8% for retail. The year-end average asking rent for office was $2.49 psf.
Recently completed lease transactions Tenant/Use
Cosmetic Surgery
Dermatology
Physiatry
Multi-Specialty
Address
3655 Nobel Drive UTC
5550 Carmel Mountain Rd Carmel Valley
3144 El Camino Real Carlsbad
225 E. Second Ave Escondido
Class
A
Retail
A
B
SF
4,112
3,674
2,410
49,302
Term
63 months
124 months
72 months
96 months
Start Rate
$3.50 FSG
$3.50 NNN
$3.08 NNN
$2.10 NNN
Execution Date
09/17/2015
12/04/2015
09/16/2015
11/20/2015
Increase
3.5%
3.0%
3.0%
3.0%
Free Rent
3 months
4 months
3 months
4 months
TIA/SF
none
$50.00
none
confidential
Type
renewal
new lease
new lease
renewal/expansion
Recently completed sale transactions Project Address
Buyer/Seller
SF
Price/Sale Date
Cap Rate
Leased at TOS
Price per SF
2100 5th Ave San Diego
Alicja Steiner, MD 2100 Fifth Avenue, LLC
10,178
$3,950,000 11/15/2015
owner-user
67%
$388
1400 E Palomar St Chula Vista
Sharp HealthCare Ventas, Inc.
67,372
$22,499,500 11/18/2015
owner-user
100%
$334
135 Saxony Rd Encinitas
Chris Pham, DDS Connie Sillen
10,040
$3,800,000 12/04//2015
owner-user
48%
$378
1297 Carlsbad Village Dr Carlsbad
Kellen Tadano, DDS Carlsbad Medical Village, LP
2,617
$1,110,000 11/18/2015
owner-user
0%
$424
sdmedicalrealestate.com
Total Inventory (sf)
Q4 Total net absorption (sf)
YTD total net absorption (sf)
YTD net absorption (% of inventory)
Direct vacancy (sf)
Direct vacancy (%)
Prior year direct vacancy (%)
Average asking rent ($ psf)
Prior year avg. asking rent ($psf)
Oceanside/Vista
972,225
40,084
50,409
5.2%
101,111
10.4%
15.0%
$2.21
$2.37
Escondido/San Marcos
929,042
16.7%
$2.44
$2.52
North County Coastal
VIEW AT CORNER OF CARMEL MOUNTAIN & CARMEL COUNTRY -21,081 -3,411 -0.4% 160,724 17.3% RD
1,221,105
38,663
65,892
5.4%
57,392
4.7%
5.2%
$3.64
$3.09
882,951
-4,740
2,703
0.3%
54,743
6.2%
6.5%
$2.79
$2.84
La Jolla/UTC/Sorrento
1,822,677
4,585
-29,866
-1.6%
122,119
6.7%
3.9%
$3.49
$3.18
Kearny Mesa/ Mission Valley
1,462,243
8,960
43,124
2.9%
78,961
5.4%
10.7%
$3.01
$3.14
958,378
-9,496
37,515
3.9%
72,837
7.6%
12.7%
$2.70
$2.54
East County
1,784,112
10,553
-11,978
-0.7%
174,843
9.8%
9.0%
$2.11
$2.12
South County
1,412,895
-841
20,381
1.4%
108,793
7.7%
9.2%
$2.47
$2.35
524,677
-2,160
29,434
5.6%
16,265
3.1%
11.8%
$2.18
$2.51
11,970,305
64,527
204,183
1.7%
947,789
7.8%
9.7%
$2.70
$2.64
I-15 Corridor
Uptown/Hillcrest
Other Market Totals
Investment sales spotlight $167 million in total medical office sale consideration was recorded San Diego County in 2015, up from $133 million in 2014 and on par with the record volumes posted in 2012 and 2013. To give you an idea of the unmatched activity we have been seeing over the past four years, the previous peak of 2007 and 2008 combined for $215 million – an average of $107.5 million per year. In other words, in three of the last four years (’12, ’13 and ’15) we have seen at least 50% higher annual sales volume than the ‘07/’08 peak, and even ’14 was up nearly 25%. It is clear that demand for medical office property has reached unchartered territory. Investors of all types are attracted to the stability and growth that the healthcare space is experiencing. The steadily improving market conditions are resulting in strong occupancy rates and rent growth, and attractive financing for healthcare real estate helps justify high pricing as well, bringing more sellers to the dance. .
18
19
21
22
23
18 18
OCEANSIDE OCEANSIDE VISTA VISTA
15 15
78 78
ESCONDIDO ESCONDIDO SAN SANMARCOS MARCOS
Scripps Memorial Hospital Encinitas Scripps Memorial Hospital Encinitas Scripps Green Hospital Scripps Green Hospital Scripps Memorial Hospital La La Jolla/Prebys Scripps Memorial Hospital Jolla/Prebys Cardiovascular Institute Cardiovascular Institute Scripps Mercy Hospital Hillcrest Scripps Mercy Hospital Hillcrest Scripps Mercy Hospital Chula Vista Scripps Mercy Hospital Chula Vista
15 15
NORTHCOUNTY COUNTY NORTH COASTAL COASTAL
Sharp Memorial Hospital/Sharp Mercy Birch Hospital Sharp Memorial Hospital/Sharp Mercy Birch Hospital Sharp Grossmont Hospital Sharp Grossmont Hospital Sharp Coronado Hospital Sharp Coronado Hospital Sharp Chula Vista Medical Center Sharp Chula Vista Medical Center
56 56
UCSD Thornton Hospital/Jacobs Medical Center UCSD Thornton Hospital/Jacobs Medical Center UCSD Medical Center Hillcrest UCSD Medical Center Hillcrest
LA JOLLA LA JOLLA UTC UTC SORRENTO MESA SORRENTO MESA
21 21
Palomar Health Downtown Campus Palomar Health Downtown Palomar Medical Center Campus Palomar Medical Center Pomerado Hospital Pomerado Hospital
I-15 I-15 CORRIDOR CORRIDOR
805 805
52
KEARNY MESA 52 KEARNY MESA MISSION VALLEY MISSION VALLEY
15 15 19
163
8 8
163
18
125 125
19
Rady Children’s Hospital Rady Children’s Hospital
Alvarado Hospital Medical Center Paradise Valley Hospital Alvarado Hospital Medical Center Paradise Valley Hospital
67 67
20 20
OTHER
OTHER
UPTOWN HILLCREST UPTOWN 22 HILLCREST
EAST COUNTY EAST COUNTY
94
94
22 125
125
Tri-City Medical Center
Tri-City Medical Center 54
Kaiser Permanente Medical Center 21 Kaiser Permanente San Diego Central Hospital Kaiser Permanente Medical Center Kaiser Permanente San Diego Central Hospital 19
22
VA San Diego Healthcare System
VA San Diego Healthcare System
23
Naval Medical Center San Diego
Naval Medical Center San Diego
54
SOUTH COUNTY
SOUTH COUNTY
15
15 USA
AL BORDER
MEXICO
INTENATION
USA
AL BORDER
MEXICO
INTENATION
JLL Expertise
JLL Healthcare Practice Group
Healthcare Real Estate Advisory | San Diego The JLL Healthcare Practice Group is San Diego’s leading team in healthcare real estate. With more than 35 years of combined industry experience, we specialize exclusively in local medical office properties and clients. Expertise. Integrity. Our clients benefit from access to our unique market intel and expertise, giving them a distinct advantage in the marketplace. Our team delivers comprehensive solutions and seamless transactions to grow your practice, system or investment. Our services include: Physicians and medical groups | Sales, leases, renewals, investments Hospitals and health systems | Strategic consulting, transactional advisory services, portfolio optimization Dental practices | Purchases and leases, practice sales, unique opportunities Developers and investors | Development and asset advisory, leasing, acquisitions and dispositions
Paul Braun Managing Director
858-410-6388
[email protected]
Chris Ross Vice President
858-410-6377
[email protected]
Hospitals Health systems Academic medical centers Medical office buildings Surgery centers Large physician practices Public institutions Sole Practitioners Dental Practices
Kelly Moriarty Associate
858-410-6359
[email protected]
sdmedicalrealestate.com
About Jones Lang LaSalle Jones Lang LaSalle (NYSE:JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual revenue of $4.0 billion, Jones Lang LaSalle operates in 70 countries from more than 1,000 locations worldwide. On behalf of its clients, the firm provides management and real estate outsourcing services to a property portfolio of 3.0 billion square feet. Its investment management business, LaSalle Investment Management, has $47.6 billion of real estate assets under management. For further information, visit www.jll.com.
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