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Healthy medical office building market continues in 2014

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2013 was a record-breaking year in San Diego medical office building sales. International real estate services company JLL’s research indicates that nearly one-third of all sales above $10 million over the last 10 years took place in 2013. A total sales consideration of $224 million was recorded on the year, surpassing the huge 2012 year that logged total sales consideration of $186 million. Even the peak years of 2007 and 2008, which combined for a total sales volume of $215 million, fell short of last year’s selling frenzy.

The rush of sales activity is continuing into 2014 and can be attributed to the perfect storm of a strong leasing environment (spurred by our aging population), unsustainable cap rate compression and the unprecedented attention health care real estate is receiving from investors due to its limited risk compared to other product types.

Additionally, few new medical office buildings will come to market in San Diego before 2015, constraining availability in 2014. Limited construction coupled with positive net absorption of 230,000 square feet -- the fourth straight year of positive net absorption -- means 2013 saw just shy of a one percent decline in vacancy on the year.

The countywide average asking rate is now at $2.48 per square foot. Tenants still pay a premium for on-campus or adjacent-to-campus buildings, but more providers are moving off of hospital campuses to reduce occupancy costs and in some cases gain better reach to their target population.

For now, smaller physician groups are hunkering down and renewing leases for as short a term as possible as they await the effects of the Affordable Care Act and Medicare turbulence, while hospitals and health systems continue their push for strategic alliances and acquisitions of physician groups.

Consolidation and partnerships are the focus for specialty clinics, complemented by larger primary care groups moving into communities to be more accessible to patients.

All of this has led to steady leasing activity in the marketplace, sky-high demand for quality, well-located investment property with strong tenancy, and new development -- most of which is slated for 2015 to 2017 delivery.

Additional data and information are available from paul.braun@am.jll.com or chris.ross@am.jll.com.

-Submitted by Paul Braun and Chris Ross, JLL.

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