Medical Tenants Filling Space

While most of Southern California’s commercial real estate market suffers from a painful slump, a few lucky landlords seemed to have found a cure: the health-care business.

The expansion of the medical industry--including the growth of outpatient surgical centers--and relatively little new construction have pushed the vacancy rate for medical office space across the region to about 5%, roughly one-third of the rate for office space in general, brokers and property owners say.

Rents at medical office space are running at least 10% above general leasing rates, and some traditional office owners who were once reluctant to lease to doctors are welcoming medical tenants to hard-to-fill space.

In Beverly Hills, home to one of the nation’s most prestigious clusters of medical office buildings, medical office landlords are getting some of the highest monthly office rents in Southern California--nearly $4 a square foot. Doctors eager to be in the neighborhood are being offered space in windowless basement storage areas, and one building owner is cashing in on Rodeo Drive by converting commercial offices into medical space along the famous shopping strip.

“Compared to commercial office real estate, medical office space is much ... healthier,” said medical building owner Robert Held.

Brokers and property owners say demand has built steadily for the last three years after the medical real estate market stagnated in the wake of consolidations and cutbacks among medical groups in the early and mid-1990s. In addition to expanding medical groups, a significant portion of the need for medical space is being driven by outpatient surgery centers, where patients can undergo relatively minor surgical procedures once performed at hospitals.

“You are seeing those pop up all over Los Angeles and beyond,” said real estate broker Marc Lebowitz of First Property in Beverly Hills.

Despite the growing demand, medical office space makes up a small slice--perhaps 5%--of the overall office leasing market and is often an overlooked specialty in real estate. Many cities impose limits on where medical offices and facilities can be located, and the offices themselves require more extensive plumbing and electrical systems than generic office space as well as more parking--factors that increase building costs and limit a landlord’s flexibility. Many office building owners are reluctant to rent to doctors and surgical centers because they don’t fit into the typical corporate image.

“Traditional office users provide an awful lot of resistance to any building that allows doctors,” said broker Nick Christensen of CB Richard Ellis.

But as landlords struggle with a shortage of new tenants and existing medical space grows hard to find, doctor offices and medical facilities are opening in more traditional office buildings. In Westwood Village, Innovative Healthcare Management recently leased about 14,000 square feet of street level space for an outpatient surgical center and offices in Westwood Center, a sleek office tower owned by Arden Realty and populated with attorneys and other professionals.

“The major problem was that there was not enough medical space in a medical building,” said Bill Simon, president of Innovative Healthcare Management.

It took the owners of the Rodeo Collection, a small shopping and office complex, only three weeks to lease about 30,000 square feet on Rodeo Drive to plastic surgeons and other medical practitioners after spending months looking for traditional office or retailer users, said broker Bruce Kaufer of Grubb & Ellis.

“The medical demand is there, and we took advantage of that,” Kaufer said.

Falling vacancy rates and rising rents in medical office properties have prompted some investors to start building medical offices buildings at a time when other developers are scaling back or postponing projects.

Backers behind the $12-million Irvine Medical Plaza are confident enough about future demand that they have purchased land and are poised to start construction on the 43,000-square-foot building without any signed leases, said broker John Wadsworth of Colliers Seeley, who represents the property. That confidence stems in part from the fact that the medical office vacancy rate in rapidly growing South Orange County is only about 2.5%, while the market overall is 25% vacant.

Daniel Gottlieb, chief executive of Beverly Hills landlord G&L; Realty, said that the firm’s seven medical buildings--totaling about 235,0000 square feet--in the city are virtually fully leased and that the firm started to convert storage areas into office space to satisfy demand.

Owners of the 7,800-square-foot Specialty Surgical Center on Brighton Way bought a 50,000-square-foot Wilshire Boulevard office building they plan to transform into a medical facility with seven outpatient operating rooms. Orthopedic surgeon Andrew Brooks said the facility would allow the group to increase the number of monthly surgeries it performs from 700 to nearly 1,200.

“We looked for about a year to find space on a large scale in Beverly Hills, but that was impossible,” Brooks said.