Medical Office Report 2015 - JLL

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


Kelly Moriarty Associate


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


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


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


I-15 Corridor



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%


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


$3.25

I-15 Corridor

$3.50


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


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


929,042

16.7%

$2.44

$2.52


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


Chris Ross Vice President


Hospitals Health systems Academic medical centers Medical office buildings Surgery centers Large physician practices Public institutions Sole Practitioners Dental Practices

Kelly Moriarty Associate



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.
