Demand is outpacing supply for medical offices in Orange County, according to data from JLL, OC’s second-largest commercial property manager and commercial real estate brokerage.
Medical office building construction has remained “extremely low” in the region, JLL said. A sign of demand for medical office space in Orange County is a 34% increase in lease rates, which have risen from $2.44 per square foot in 2013 to $3.28 in the second quarter, JLL said.
“In Orange County, zoning laws are against medical facilities,” Chris Isola, JLL’s executive vice president for healthcare in Southern California, told the Business Journal. “It’s hard to find large blocks of space in Orange County.”
Isola and Bryan Lewitt, a managing director at JLL, oversee the brokerage’s health sector in Orange County, representing hospitals, clinics and dialysis centers along with owners of real estate.
Hospital Boom
Billions of dollars are being spent on new hospitals in Orange County, from Providence Mission in Mission Viejo to Irvine with the University of California, Irvine and City of Hope.
Hoag Memorial Hospital Presbyterian is spending $1 billion to expand its facilities in Irvine.
The building boom comes even as the industry is undergoing a paradigm shift where more than 90% of care received by patients is outside a hospital.
A recent JLL survey found that location is the second-largest factor patients consider when choosing medical care, ranking only behind insurance acceptance.
While strip malls are seeing an increase in medical offices, it’s not as easy as it looks because zoning laws often are not flexible in converting retail spaces to medical offices, they said.
“Nobody thought healthcare would go into retail locations,” Lewitt said. “Now it’s going big time.”
Reluctant Sectors
The pair cited two real estate sectors that are experiencing low occupancies and could benefit from medical offices but are reluctant: shopping centers and traditional office buildings.
The pair pointed to a South Orange County mall whose tenants are able to prohibit medical offices from planting their flag within the property.
“If you take a retail center, there’s a stigma among traditional owners that if you have healthcare that customers will see blood and bandages and people won’t want to shop,” Lewitt said.
“It’s the opposite. You’ll see an advancement in retail sales. Patients are going to want to spend money in their retail stores. It’s up to us to educate the owners.”
Commercial building owners often don’t want the hassle that comes with medical offices, they said.
“Medical buildings are land hogs,” Lewitt said.
Owners lose about 40% of buildable areas because city laws often demand much more parking available than traditional offices.
Tenant improvements for medical offices are often 40% to 50% higher than normal and it’s more difficult to maintain if the offices operate 24/7, requiring more water and electricity than normal offices.
