With escalating construction costs and growing rents, an increasing number of physicians in the Valley area are opting out of renting space in traditional medical office buildings in favor of buying space in medical condominiums in fast-growing areas where land is cheap. Among the most popular centers of the movement, say those familiar with the trend, are areas experiencing swift population growth, such as the Antelope, Conejo and Santa Clarita valleys and portions of Ventura County. “Places where they’ve got dirt available and there are still places to build new medical office buildings,” said Michael Dettling, director of the Ramsey-Shilling Healthcare Real Estate Group who represents medical office buildings. He said the popularity of for-purchase office units is growing as the medical office vacancy rates in the Valley plunge below 5 percent and rental costs creep towards $5-a-square-foot. That’s forcing doctors to look at new options. “They’re taking off now because the rents are going crazy and the doctors (want) something they can afford and own,” he said. John Moutsanas is a broker representing Meridian Professional Center, a 70,000-square-foot medical and office complex near Palmdale Regional Medical Center. The center isn’t scheduled to open until fall, but Moutsanas said he’s already been contacted by at least 50 different doctors and medical groups interested in the space. The demand is staggering, he said. “We’ve seen a large number of inquiries,” he said. “There’s been a fabulous amount of interest right there.” Higher costs, higher risks The nascent medical condo trend is largely fueled by several overlapping factors inherit to medical spaces, the biggest being the location itself. Many times, doctors going into private practice prefer to open an office near the hospital in which they maintain their rounds, which often leads to a concentration of smaller medical buildings around hospitals. In many areas, new buildings can be added as demand warrants it, but in places like the San Fernando Valley, where land is at a premium and construction costs are high, building a new structure near a hospital is often impossible. Dettling said the conditions have become so tight in the Valley that many office building owners are realizing doctors are willing to pay higher prices in existing buildings. “The low vacancy rated coupled with no new product coming online is just fueling these skyrocketing lease rates. With no new space, doctors are having to share space just to practice,” he said. In this environment, some building owners are switching tactics and offering the space to buy. “The doctors won’t buy those lease rates,” he said. “They say, ‘How about we let them buy into the building?” That was one reason Dr. Stephen Kundell bought a medical condominium in Newbury Park for his pediatrics office a few years ago. He said it was an investment choice. “It’s a rational business decision to have some control over your rent on a long-term basis,” he said. “And since practices tend to place themselves in a particular location for long periods of time, it especially makes sense.” Jeremy Barbakow, a principal with Lee & Associates who covers northern L.A. County and Ventura County, said doctors like the idea of owning their own space, especially if it means not owning an entire structure. “There’s definitely enough clients out there. It’s just they might not want to build a 30,000-square-foot building. They want to get in on a 4,000 square-foot-space,” he said. For the moment, the new condos are mostly concentrated where property is cheap and available, such as in Lancaster, Camarillo and Santa Clarita. “There’s a lot of land out there,” said Barbakow, a broker on several projects in the Santa Clarita Valley. “It’s a very big growth community where people think they’ll be there forever. They think, ‘Why not buy now?'” Dettling said the medical condo trend has missed the San Fernando Valley for a simple reason: there’s no land to develop. “There’s plenty of demand if someone were developing something,” he said. But that doesn’t mean it won’t change. Dettling expects the need for space will continue, maybe even to the point that developers will turn new office building units from for-lease to for-purchase. “Anybody building a new medical building in the Valley might be wise to consider offering (it) as medical condos,” he said. “If they build it, they’re going to have to charge close to $5 a foot, which the doctors can’t afford. I don’t see anything slowing down.”
