NextMed Group is one of the few companies developing medical office buildings in North County, where space is hard to find and demand is on the rise. San Diego’s North County is the epicenter of San Diego County medical projects. Kaiser Permanente, Palomar Health, and Tri-City Medical Center are constructing new medical space in the area. NextMed has prospered using a model in which physicians, surgery centers, and other medical practitioners can acquire an ownership interest in the space they lease.

“We feel like we’re a little bit ahead of the market,” said Scott Leggett, founder of NextMed Centers. “The whole idea is just to build a different brand and build a community relationship. We’re just trying to be a little bit different.”
Scott Leggett, Founder, NextMed Group

This plan is attractive to medical practitioners because they can partly offset what Leggett said were downward pressures on medical practices, such as cuts in reimbursements from Medicare and private insurance companies by owning shares in the property they use.

“A lot of time, physicians know they should own their real estate, but they don’t have the time and the money to make it happen. That’s something we can help with,” Leggett said. “There’s just a lot of pressure on physician reimbursement. There has been for decades now.”

Steady Growth

NextMed’s first project was at 6121 Paseo del Norte, a 23,000-square-foot building they closed on with a physician’s group under a prior entity in March 2011. About half of the building was home to Carlsbad Surgery Center, and physician practices associated with the owners moved into the rest of the building.

NextMed followed the initial project with the acquisition of an 11,000-square-foot former industrial building at 6125 Paseo del Norte in December 2012. They subsequently enlarged and redeveloped it in 2016 into a 20,000-square-foot medical building.

“NextMed executed extremely well on some very challenging projects early on, particularly with their second acquisition, the 6125 building,” said Chris Ross, executive vice president of JLL, which represents NextMed in leasing the projects.

“Everything they’ve done had its own unique obstacles,” Ross said. “Now they’ve got that experience and the case studies to support their vision of delivering premier facilities and creating ownership opportunities for some of our region’s top physicians, in the process providing better access to first-class medical care in our community.”

Next up was NextMed’s 2018 project to reposition twin buildings at 6183 and 6185 Paseo del Norte totaling 75,000 square feet. Zoning regulations setting parking requirements capped the amount of space that could be used for medical offices at 6,000 square feet. To allow for all of the buildings to be used for medical offices and outpatient care, NextMed built a 36,000-square-foot parking deck.

In 2022, NextMed moved beyond its home base in Carlsbad to Kearny Mesa. They renovated a 39,000-square-foot general office building into a surgery center and medical offices. They gutted the interior and expanded the building to 43,000 square feet.

Unmet Need

While demand for medical office space in San Diego County is high, available space at the end of 2022 wasn’t even close to keeping pace according to JLL and other commercial real estate brokerages. JLL reported that at the end of Q4-2022, less than 100k sqft of medical office space was under development – 60% below the county’s average over the past 20 years.

“Absorption of medical space continues to outpace new deliveries,”
said a recent JLL report.

Lars Eisenhauer, a first vice president of CBRE, said that “the medical office market is as strong as it’s ever been,” but construction costs that are higher for medical space, inflation, rising interest rates, and the flagging economy in general are deterrents to new medical construction.

Finding land with the proper zoning also is a challenge.

“I don’t think you’re going to see much change on the inventory side,” Eisenhauer said. “When you’re looking for space in a lot of markets, you don’t have a lot of options. You may have a couple.”

Kaiser Permanente’s $403.3 million hospital in San Marcos is by far the biggest ongoing medical construction project in San Diego County. The seven-story San Marcos Medical Center is on schedule and on budget according to Max Villalobos, Kaiser Permanente chief operating officer for North County. Construction was nearly finished by January-end. The new hospital will have 206 private rooms, eight operating rooms and a 39-bay emergency department. The hospital will use reclaimed water for landscaping and cooling towers and has LED lighting throughout, electric vehicle charging stations, bike racks to encourage bicycle commuting and a transit center.

The San Marcos Medical Center is Kaiser’s third acute care hospital in San Diego County and follows the August 2017 opening of its $850 million San Diego Medical Center in Kearny Mesa. Kaiser Permanente also operates Zion Medical Center which opened in 1975. The new North County hospital will serve patients who live north of State Road 56 as far north as Fallbrook according to Villalobos.

Behind the Numbers

• In 2020, more than 1.6 million SF of negative assimilation was amassed.
• Countywide generally opportunity expanded 95 premise focuses (BPS) in Q4 to reach 12.9% – the most significant level since 2015.
• After 30 fourth of consistently up moving rental rate expands, the countywide normal asking rental rate balanced out at $2.93/SF/month by midyear and stayed level at year-end.
• Expanded interest for life science space has been supporting the transformation of existing office space, which will alleviate any drawn out opportunity pattern throughout the following not many years.
• As office supply and sublease openings surpass request, inhabitants will encounter more positive renting terms and concessions in 2021.

Net Absorption

By and large office request has been declining countywide since the principal quarter of this current year. In Q4, 600,941 SF of negative net retention was recorded carrying 2020 all out net ingestion to a negative 1.63 million SF. The practically yearlong COVID-19 pandemic keeps on driving organizations keep on carrying out telecommute (WFH) strategies that have discouraged everyday office space usage. Furthermore, a few occupants have encountered perpetual cutbacks, offering back unnecessary space as they arrange rent restorations.

2020 had the biggest yearly abatement popular, as estimated by net assimilation, recorded in the 25 years that Colliers has followed the nearby office market. The record negative movement even surpassed by 134% the earlier most noticeably awful year of 2008 (- 695,416 SF), which was during the time of the Great Recession.

The diminishing popular influenced all office classes countywide and a greater part of submarkets. A significant part of the expanded opportunity was because of more modest occupants emptying space across practically all submarkets, anyway there were a couple of remarkably enormous move-outs. Wawanesa Insurance cleared 152,944 SF at their two recently possessed structures at 9040 and 9050 Friars Road in Mission Valley. Wawanesa moved into 75,000 SF at 7650 Mission Valley Road in Q3 and the recently involved undertaking is being revamped by the Casey Brown Company. Illumina abandoned 73,716 SF at 4747 Executive Drive in UTC, which is being advertised as sublease space. Sharpened stone Insurance emptied at full floor (- 23,271 SF) at 701 B Street in Downtown San Diego, Atlazo cleared 17,989 SF at 4250 Executive Square in UTC, and YMCA abandoned 15,823 SF at 3333 Camino Del Rio S. in Mission Valley.

In Q4, Kearny Mesa posted the best net retention (+54,873 SF), supported by Cubic Corporation’s finishing of two form to-suits structures adding up to 250,000 SF. Just nine different structures across the region posted positive net ingestion surpassing 10,000 SF. The biggest move-ins incorporated the law office of Lewis Brisbois Bisgaard and Smith LLP (+36,734 SF) at 550 W C Street in Downtown San Diego and Zeku USA (+19,105 SF) at 3570 Carmel Mountain Road in Carmel Valley.

Opportunity

Negative ingestion in many submarkets all through the County has caused the opportunity rate to increment to 12.9% toward the finish of Q4. This was almost a one-point increment over a three-month time span. Direct opening expanded to 11.7% (+75 BPS) and sublease opportunity expanded to 1.2% (+20 BPS).

Sublease opportunity of 1.2% of the complete office stock is twofold that that of normal pace of 0.6% throughout the most recent three years. Sublease opening arrived at a 15-year of 2.5% in Q4 2007 however dropped consistently and evened out at 0.7% up until mid 2020. Direct empty space has been the place where a large portion of the increments had been acknowledged in 2020.

Opportunity has been speeding up in a portion of the center office markets like Carlsbad (17.3%) and Mission Valley (15.0%), however the greatest increment has been in Downtown San Diego where 357,917 SF of negative net ingestion in 2020 has driven empty space to make up almost one-quarter (23.5%) of the complete office base.

New Supply

Cubic Corporation’s two-building work to-suit base camp at 9333 Balboa Avenue in Kearny Mesa was the lone undertaking finished during Q4. The two structures were 125,000 SF in size and supplanted previous modern structure on piece of the site. There are at present nine structures adding up to in excess of 2 million SF under development countywide.

Luckily, San Diego County isn’t at the danger of being overbuilt in the close to term. Of the 538,484 SF that was finished in 2020, just 5.3% stayed empty at year-end. Negative net ingestion in the current base was the sole justification the expansion in opening during 2020.

Another 1.05 million SF is scheduled for fulfillment in 2021. This is undeniably not exactly the 1.8 million SF normal yearly fruition in the decade preceding and during the Great Recession (2000-2009). During the pinnacle of the downturn, opening arrived at almost 18% countywide and declined over the next decade (2010-2019) as stock could rent up, while new development found the middle value of under 450,000 SF-a-year by and large.

Patterns, Forecast and Outlook

While the pandemic has had unfavorably adverse consequences on office interest, the equivalent can’t be said across all business property classes countywide. Truth be told, the retail area had seen the most expansion in opportunity for the year, expanding from 3.1% in 2019 to 4.1% in 2020. The modern area really had a solid year with 1.64 million SF of positive net ingestion.

In this way, the impacts of the pandemic are not exclusively showed in general wellbeing suggestions alone however have enhanced and sped up new contemplations on how office space is utilized. Preceding the pandemic, patterns in cooperate/adaptable space and WFH were at that point in the outset of a drawn out office pattern, yet the pandemic has hastened this pattern up to a lot more organizations and their labor force. Future contemplations for office clients, administrators, and proprietors won’t just have to battle with the prompt impacts of the COVID-19 fallout on their organizations, yet at long haul impact on office working environment culture, workstyle, and space usage.

A rampart against a potential decreasing of office request countywide is the developing interest in the existence science area, driving up interest for additional structures that will oblige research facility and R&D space. In 2020, life science and wet lab space saw opening drop by 269 BPS to 7.0%.

New ground-up improvement for life science space is restricted by accessible land, yet in addition by advancement costs. This has drawn revenue for extra stock being changed over from conventional office space just as an emphasis on looking for substitute submarkets for new turn of events.

In Q4, Longfellow Real Estate Partners bought “The Foundry” – a 281,000 SF two-building Class An office mid-ascent project in Sorrento Mesa – with plans to change the venture over to life science space. Furthermore, Longfellow is changing over 23-structures with 660,000 SF of R&D space into very good quality lab space in the adjoining Sorrento Valley market. Over the course of the following year, we can expect greater redevelopment of office space and ground up life science development.

With the guarantee of another immunizations being controlled over the principal half of 2021, there is a potential for some representatives to move from their present WFH circumstances back to the workplace. After longer than a year being away from the workplace, the should be in an office climate for expanded usefulness, cooperation, socialization, and surprisingly mental prosperity will reestablish a few – however not all – of the 2020s lost interest for office space.

Luckily, San Diego holds a gifted labor force and inventive ventures that are at the cutting edge of development and advancement across the country. It is the explanation San Diego positions third in the country for life science work and one of five metropolitan regions that contain more than 90% of the tech occupations across the country.

The once-busy Sandiego Westside Pavilion has been open since the mid-1980s. But soon most of its shops will disappear.

A major renovation project will convert about 80 percent of the mall’s space into Sandiego offices.

One of the Pavilion’s anchor stores, Macy’s, is holding a closing sale. Nordstrom has already moved out.

The owners of the 600,000 square foot mall say it will maintain some retail space, including a movie theater and restaurants.

The move comes at a time when malls and retailers are struggling to compete with online shopping.

The renovation project will cost at least $425 million. It’s expected to be completed by mid-2021.