Unlike some asset types in Los Angeles that have been barely scraping by – namely the office market – the medical outpatient market is doing well.
“The medical market is very healthy,” said Bryan Lewitt, a managing director for Jones Lang LaSalle Inc. and cohead of the company’s Southern California Healthcare Services Group. “With a less than 10% vacancy in this market, it’s one of the healthier markets of any class of real estate.”
This past quarter, the total medical outpatient vacancy rate for L.A. fell to 9.6%, according to a JLL report. While still above the historic low vacancy rates of 2016 to 2019, Lewitt classifies that figure as strong.
The county saw a total of 6,200 square feet of positive absorption across all submarkets in the first quarter. With very little sublease space available and multiple proposed new construction facilities underway, the market is in growth mode.
According to the report, the majority of positive leasing is attributed to the Tri-Cities – Burbank, Glendale and Pasadena – and San Fernando Valley regions. Combined, these submarkets accounted for more than 80,000 square feet of positive net absorption in quarter one.
The reason behind their dominance, Lewitt says, is big industry players, such as UCLA Health and Cedars-Sinai, expanding their own facilities and resources out of the Westside – which is still considered the industry’s core in terms of most resources and largest hospitals – and into the suburbs.
“I would say that they are an extension of the Westside,” Lewitt said. “You’re seeing a migration of the hub and spoke model of the consolidation of those hospital systems moving out into those areas.”
Submarkets like downtown, San Gabriel Valley and Southeast L.A. are all very strong markets too. Lewitt said dermatology, ophthalmology, men’s health and physical therapy are the four most active specialties right now.
Private equity slowdown
But with all things good come some hardships, too, and that has mainly come in the form of a private equity slowdown.
“With the increase in debt challenges that the private equity companies are now (facing), they’re trying to manage what they’ve digested in the last five years rather than trying to acquire more,” Lewitt said. “The higher interest rates, the lack of liquidity in the market, the standards that people have on their reinvestment returns have changed because of the higher interest rates. All of that is not a good environment for private equity to continue to acquire physician practices.”
Another speedbump Lewitt pointed out is the “continuation of over-regulation in the health care industry,” referencing Senate Bill 525 – a law which will increase the minimum wage for health care workers to $25 per hour – that Gov. Gavin Newsom signed in October.
According to Lewitt, employee wages are 70% of health care clinics or medical groups costs. So, when that salary goes up, there’s price compression across the whole salary chain.
“This disrupts the whole price structuring of the health care industry providers,” Lewitt said. “It’s a huge effect on it.”
Unlike other industries which can offset increased salaries by reflecting additional wages into the consumer’s bill, the health care industry can’t do that since they are heavily regulated by insurance companies and the government.
“They’re going to be constricting their growth plans,” he said.
But looking ahead, Lewitt thinks the sector will indeed grow as more and more office and retail properties will be converted into medical facilities – a trend he said is just beginning to emerge amid a struggling office market.
“The office market is not getting any better,” he said. “Owners are trying to be creative and protect their assets and protect their investments by looking towards other types of tenants. Health care is a logical one.”
