Medical Office Space Gets Harder to Find

SAN DIEGO COUNTY – Doctors, dentists and other medical practitioners looking for space in 2024 will have a tough time.

Contrary to what’s happening with general office space, demand for medical office space has far outpaced supply.

“If you look at a medical group that’s trying to grow or relocate for whatever reason, they’re going to go out to the market and quickly find that they have few options,” said Kelly Moriarty, senior vice president in JLL’s San Diego Healthcare Practice Group.

Because medical office space is so scarce, “The larger you are, the more difficult it becomes,” Moriarty said, adding that what space is available is becoming costlier.

“The lack of supply continues to put upward pressure on rental rates. We continue to see that continuing for the near future,” Moriarty said.

By the end of 2023 – figures are not yet available for 2024 – the average monthly rental rate offered by building owners for medical office space was 6% higher than it was at the end of 2022 at $4.22 per square foot, breaking the $4 mark for the first time, according to JLL.

So tight is the market that JLL forecast that rental rates will top $5 per square foot for class A space – an all-time high – by the end of the first quarter of 2024.

Among the practices seeing the highest demand nationally and in San Diego County are those dealing with fertility and behavioral health, orthopedics, and rehabilitation care, Moriarty said.

Obstacles to Converting Office Space

San Diego’s vacancy rate for medical office space stood at 5.2% at the end of last year, well below the national average of 7.75 %, JLL reported.

Submarkets with the highest vacancy rates in the fourth quarter of 2024 were Hillcrest at 2.2%, South County at 3.1%, and La Jolla/UTC/ Sorrento Valley at 3.3%.

Vacancy rates have been on a fairly steady decline since at least 2013, with the exception of a dramatic increase in 2020 during the worst of the COVID 19 pandemic, according to JLL.

With just 9,990 square feet of ground-up medical office space under construction in the fourth quarter of last year, the odds are that the market will remain extremely limited, JLL reported.

“There’s a handful of conversions that are office to medical conversions that are taking place in the market, but it’s nothing near what would be needed to meet the current and ongoing demand that we see,” Moriarty said.

Converting office space for medical uses can also be a challenge.

“The biggest prohibitive side of it is the zoning, because there are only certain pockets countywide, geographically where you could put a medical office building,” Moriarty said.

Aside from zoning, medical offices also need more parking than general offices.

“It’s not a slam dunk that you could just go take an office building that’s mostly vacant and say, ‘Well, let’s pivot to medical,” Moriarty said.

JLL
FOUNDED: 1837
HEADQUARTERS: Chicago
CEO: Christian Ulbrich
BUSINESS: commercial real estate brokerage
EMPLOYEES: 106,000+
WEBSITE: www.us.jll.com
CONTACT: 858-410-1200
NOTABLE: JLL has an annual revenue of $20.8 bill with operations in more than 80 countries.