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Posted: Monday, June 22, 2009

Medical Office Space Still Healthy Investment Option

Talk to real estate broker Stephen Stein and you’ll get the sense that while the medical office market may have slipped a bit, it is doing well all things considered.

The downtown L.A. regional manager for Marcus & Millichap Real Estate Investment Services Inc. has not only made a career of brokering the sales of medical office buildings but until recently had an ownership interest in a Torrance property.

“It was a great investment, it always remained full. That is one of the things that’s most attractive about medical office,” said Stein, of the four-story building at 19000 Hawthorne Blvd. that houses doctors’ offices.

Stein sold his interest in the property in January for personal reasons but remains high on the sector, even though a report by his company shows that vacancy rates are up and rents are down in Los Angeles County.

The vacancy rate for medical office space in the county was 8.7 percent in the first quarter of 2009, up from 8 percent a year ago. But that is nearly three full points below the 11.5 percent vacancy rate for the rest of the office market, according to the Marcus & Millichap report.

Average asking rents also fell, by 1.7 percent to $2.72 per square foot per month. But medical office brokers believe that the traditional strengths of the sector – especially the high cost and difficulty in building the product even as the population ages and demands more services – will carry it through the downturn and allow for a quick rebound.

“There is a built-in demand for medical office,” said Steve Miller, who heads a namesake medical office brokerage in Redondo Beach. “As the economy and the credit markets improve you’ll have people feeling more confident about making commitments to expand or move their space.” 

New projects

To meet growing demand, a spate of medical office projects have opened in the last few years. In 2008, for example, developer Pacific Medical Buildings opened a 97,000-square-foot, $38 million medical office building in Burbank next to Providence St. Joseph Medical Center. This summer it will open a 190,000-square-foot, $80 million medical office next to Huntington Hospital in Pasadena.

The county market is outperforming the national medical office market, with a vacancy rate three points below the national average, according to Marcus & Millichap. Still the brokerage predicts that the local vacancy rate will hit 9 percent by the end of the year.

Stein blamed it on the economy: “It spans all product types; there is some pull back.”

While medical office landlords are somewhat insulated from the downturn because medical professionals are typically reluctant to move given the amount of expensive equipment involved, doctors aren’t above asking for a deal. 

“If the building is well managed and their needs are attended to, (medical professionals) are not as price sensitive as other tenants,” he said. “That doesn’t mean a medical office building owner isn’t getting requests for reduced rent from doctors. But it’s less often than at traditional buildings.”

However, one clear weak area has been investment sales, as a result of the freezing of credit markets. In particular, medical office condos, which were projected to be a big hit when they were rolled out a few years ago, have flopped due to a lack of financing.

“A lot of people were thinking that would be a great opportunity for doctors to own their own space but (then) they started looking at prices to build out,” said Tim Vaughan, a CB Richard Ellis Group Inc. broker who specializes in the medical office sector.

However, Vaughan believes that a rebound from the sector’s modest drop-off is imminent. By early 2010, he predicts, the vacancy rate will start to drop.

Article By: Daniel Miller of The Los Angeles Business Journal


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