By John Wadsworth
The medical office market in Orange County is seeing similar trends to that of other commercial real estate sectors, but not to the same extreme.
Overall, the medical office building segment of the commercial real estate market, with a current base of 7.6 million square feet (excluding hospitals and buildings owned or occupied by hospitals) is relatively healthy.
Countywide vacancy for medical office buildings is at 11.4%, a 3% increase from a year earlier. Compared with traditional office buildings, where vacancy has skyrocketed from 11% to more than 18% in the past 12 months, medical office buildings, so far, seem to be more insulated from the current slowdown.
Despite current market conditions, the medical office market continues to maintain a pulse of growth. In particular, four speculative buildings totaling 118,000 square feet broke ground in 2008 and are in the final stages of construction. Fullerton’s Providence Two, developed by Irvine-based Accretive Realty Advisors Inc., is nearing completion and is set to open in October. Providence Two is the final phase of Providence Medical Center next to St. Jude Medical Center in Fullerton.
Providence Medical Center includes medical buildings totaling 110,000 square feet. Restaurants within the project, including Panera Bread, Pete’s Coffee and Z Pizza, total 10,000 square feet.
Three other projects that broke ground in 2008 include Irvine-Booth Medical Center, a single-story,17,942-square-foot medical condominium building in Irvine; Odyssey Medical Center, a 51,000-square-foot, two-story medical office building in Irvine; and Rose Medical Plaza, a 25,000-square-foot, two-story medical office building on the campus of Placentia-Linda Hospital in Placentia.
Some areas of the county have softened more so than others due to the completion of multiple speculative medical construction projects. Eight projects totaling 340,000 square feet have been delivered to the market since the beginning of this year, representing a 4.5% increase in the overall base of medical buildings. Seven of these new medical office buildings are in the city of Irvine, many close to Irvine Regional Hospital and Medical Center. Of this newly delivered space, to date only 35% has been leased or sold.
Seven other medical projects totaling 400,000 square feet are planned for OC but have been held up at the drawing board due to entitlement issues, approval delays and overall market slowdown.
One veteran developer still bullish on medical offices is Irvine-based ACS Development Group. Earlier this year, ACS acquired 1.1 acres of land in Aliso Viejo for $2.7 million to make way for a 20,000-square-foot, two-story medical building. ACS is in the planning phase with this project and plans to break ground in late 2008.
Great To Be a Tenant
Medical professionals considering a purchase or lease of medical real estate are not immune or unaware of current economic conditions, with many maintaining the popular “wait and see approach” when it comes to decision-making. But the market slowdown should be a wake-up call for tenants and or buyers of medical space,much like it has been for tenants and buyers in the traditional office building segment,as the advantage has begun to shift to the favor of the tenant or buyer versus historically the landlord or seller.
It is a great time to be a tenant needing to lease space or a buyer with the desire to own or invest in medical real estate as landlord and seller concessions are more prevalent than they were 12 months ago.
There are two constants that will help drive a healthy medical office market in OC despite a slower economy, an aging population that is living longer and an ever-increasing number of countywide residents. These two constants will maintain OC’s status as an attractive location to doctors. Current economic conditions have slowed the overall velocity of medical transactions, however, so long as current population trends continue, the demand for medical space should remain positive.
Wadsworth is vice president of Colliers Healthcare Services in Irvine.
