Medical Office ReportSan Diego County

Q4 2014

Healthcare Practice Group

Leases ▪ Renewals ▪ Sales ▪ Strategic Planning ▪ Demographics & Patient Analysis

East County 14%

Kearny Mesa/ Mission Valley

13%

South County 13%

La Jolla/UTC/ Sorrento

11%

North County Coastal

10%

Uptown/Hillcrest 9%

Oceanside/Vista 9%

Escondido/ San Marcos

8%

I-15 Corridor 8%

Other 5%

Supply 11,249,335 SF

Total availability 1,264,791 SF / 11.2%

Total vacancy rate 9.7%

Under construction 175,000 SF

Quarterly leasing 54,113 SF

YTD net absorption 4,065 SF

12-mo. rent % change 2.7%

Average asking rent $2.54 FS

Key market indicators

Dema

nd

Prici

ng

Supp

ly

Market conditions and trends It’s official: countywide medical office vacancy has fallen below the 10% benchmark. Rental rates are now steadily rising. The market is showing consistent signs of improvement, with some properties achieving record sale prices and rental rates. Investment properties have recently traded for as much as $729/SF. Unique owner-user properties have reached upwards of $500-600/SF. And the new high watermark for Class A medical office rent is $4.00 NNN. Comps in this range are limited to very specific properties and submarkets, the point being that acquisition and occupancy costs are breaking new barriers. The wiser investors, developers and occupiers of healthcare real estate are strategizing and planning accordingly.

As the evolving healthcare environment becomes more competitive, providers are placing a higher value on visibility, space functionality and aesthetics. A growing number of physician groups are forging new partnerships and strategic relationships, allowing them to gain economies of scale with payors, streamline staffing needs and add new services and technology. Additionally, these new relationships often allow practices to consolidate into larger and more efficient space with reduced overhead per provider while improving the patient experience through a more appealing environment for care.

As a result, medical tenants continue to vacate Class B- and C buildings and move into Class A and B+ properties. So while countywide vacancy has dropped a healthy 120 basis points over the past year, the Class A and B+ MOB market has improved more substantially. Class A vacancy has been cut in half over the past two years, dropping from 13.3% at the end of Q4 2012 down to 6.6% today.

The countywide average asking rate is now at $2.54/SF, up 2.7% from 12 months ago. This upward trend has only just begun since increases in rental rates tend to lag vacancy compression and reduction in concessions, two trends that have been steadily occurring over the past 24 months.

Last Qtr 12-Month Change Forecast

San Diego Medical Office

Net absorption vs. direct vacancy

Inventory by

Submarket

San Diego Medical Office Report | Q4 2014

$3.28

$2.88

$2.00

$2.25

$2.50

$2.75

$3.00

$3.25

$3.50

2006

2007

2008

2009

2010

2011

2012

2013

2014

Class A Direct Asking Rent Class B Direct Asking Rent

Class A and B direct asking rents*

*Asking rents weighted by available sf and grossed to FSG

0%

2%

4%

6%

8%

10%

12%

14%

16%

-200,000

-100,000

0

100,000

200,000

300,000

400,000

2006 2007 2008 2009 2010 2011 2012 2013 2014(YTD)

Net absorption Direct Vacancy

Jones Lang LaSalle Americas Research • San Diego Medical Office Overview • Q4 2014 2

Forecast Five of the nine submarkets in San Diego are in single-digit vacancy, and most of the others will follow suit within the next 12 months. Consistent leasing activity and overall growth in the healthcare industry will lead to new highs in rental rates and sale prices in most areas by 2016. Cap rates are now at all-time lows, and for the time being only a rise in interest rates will change that.

Surveying San Diego Submarkets

Escondido/San Marcos Leasing activity has picked up in this community. Class A and B space is gradually tightening, which should only continue since the overall landscape in the area is a little more predictable now that we are past most of the unknowns surrounding how Palomar Medical Center’s move might impact local medical office trends. Additionally, after a downgrade 12 months ago, it was just announced that Fitch Ratings has upgraded Palomar Health’s outlook from negative to stable due to its improved financial performance.

Oceanside / Vista The Tri-City area is still making its gradual recovery. Net absorption was essentially flat in 2014, and the average asking rent saw a slight increase year-over-year. There are still some unknowns as to whether vacancy will stabilize to the 10% range in this submarket, but the new-and-improved board at Tri-City Medical Center seems to be helping the outlook of this hospital and medical community. Most health system executives predict some form of sale or partnership between TCMC and one or more of the other systems in the region in the foreseeable future. This will be critical

to the hospital’s rebound given the increasing need for smaller hospitals to gain better economies of scale and to better position themselves under ObamaCare.

North County Coastal Vacancy remains tight and rents have started to climb in this submarket. With all of the Class A and B+ medical buildings at or near 100% occupancy, a new medical office development is warranted but such opportunities are next to nonexistent. Scripps Memorial Hospital completed their new Leichtag Foundation Critical Care Pavilion last year as they make continued progress with their campus renovation.

I-15 corridor The I-15’s three multi-tenant Class A MOBs – 4S Health Center in 4S Ranch, Pinnacle Medical Plaza in Scripps Ranch, and Pomerado Outpatient Pavilion in Poway – collectively have just one 2,700 SF vacancy. Class B buildings should follow suit over the next couple years. Good quality space is hard to find in this area. As the population and employment base grow, so too will its demand for space near the hospital and in the high-growth areas such as 4S Ranch.

La Jolla / UTC / Sorrento What a year for the UTC medical office market. Following several expansions, consolidations and new elective practice openings, vacancy has dropped from 11.5% two years ago to 7.6% at year-end 2013 to 3.9% today….and it will continue to drop in the years ahead. Only one project contains over 10,000 SF of vacancy, and only one other has over 5,000 SF. Some owners have lifted rents by 15-20% almost overnight in response to the uptick in leasing activity – most of which is attributable to the continued growth of Scripps’ and UCSD’s hospitals, the revenue growth of surgery-related practices and other specialists, and the renewed popularity of aesthetic and cash-based procedures such as plastic surgery, Lasik, cosmetic laser treatment and liposuction.

Kearny Mesa / Mission Valley The Frost Street buildings and other MOBs in Kearny Mesa and Mission Valley have been slower to experience the improving market conditions than the neighboring submarket of UTC to the north and even Hillcrest to the south. The central location of this community and the strong foundation and continued growth of both Sharp Memorial and Rady Children’s Hospitals should prevent that from lasting much longer. Vacancy has remained flat but rents have started trending upward, and as medical groups and diagnostic service providers affiliated with the hospitals continue to add physicians and services, a musical chairs effect should take place and average vacancy will likely fall to the 8% range within 12-18 months.

Vacancy rates- By submarket

0.0%2.0%4.0%6.0%8.0%

10.0%12.0%14.0%16.0%18.0%

Ocea

nside

/Vist

a

Esco

ndido

/San

Marco

s

North

Cou

nty C

oasta

l

I-15 C

orrid

or

LaJo

lla/U

TC/S

orre

ntoKe

arny

Mes

a/Miss

ionVa

lley

Uptow

n/Hillc

rest

East

Coun

ty

South

Cou

nty

Othe

r

Direct asking rental rates- By submarket

$0.00$0.50$1.00$1.50$2.00$2.50$3.00$3.50$4.00

Ocea

nside

/Vist

a

Esco

ndido

/San

Marco

s

North

Cou

nty C

oasta

l

I-15 C

orrid

or

LaJo

lla/U

TC/S

orre

ntoKe

arny

Mes

a/Miss

ionVa

lley

Uptow

n/Hillc

rest

East

Coun

ty

South

Cou

nty

Othe

r

Class A and B direct vacancy rates

7.4%

9.3%

0%5%

10%15%20%25%30%35%

2006

2007

2008

2009

2010

2011

2012

2013

2014

Class A Direct Vacancy Class B Direct Vacancy

Jones Lang LaSalle Americas Research • San Diego Medical Office Overview • Q4 2014 3

East County The largest submarket in the county is never going to show a rapid change in vacancy and rental rates without the occurrence of a major event such as a hospital closure, but the steady population growth of East County and the lack of new development is starting to gradually bring the area’s medical buildings back to good health.

Uptown / Hillcrest Over the past several years, Hillcrest has been a very quiet submarket with very little change in leasing conditions. With two stable and centrally-located hospitals and a large base of physicians, JLL’s Healthcare Practice Group recently declared that “something’s got to give” and forecasted a change from sluggish to steady leasing activity. We may now be at that turning point. Several mid-size tenants are negotiating new transactions as we close the chapter on 2014. Other than a few practices relocating to UTC, we are not seeing any signs of an upward trend in vacancy. With most buildings now stabilized, rents have started to climb in the area.

South County Six projects in South County contain about 70% of the submarket’s vacancy. Since these 6 buildings are spread out geographically, it is a little more challenging for tenants to identify two comparable buildings to compete for the tenant’s “business” (occupancy) than one might expect. Although South County’s hospitals operate at a negative margin – primarily due to poor payor mix – and are essentially kept afloat by the other hospitals in their respective health systems, its vast population will only continue to grow. Reimbursement and collection issues aside, more people yields a greater need for health care which results in higher demand for medical space. Community health centers such as San Ysidro who have had a strong, long-standing presence in the South Bay are well-positioned under the Affordable Care Act given the surge in newly insured patients.

News and updates Kaiser Permanente’s new hospital campus on Ruffin Road in Kearny Mesa is making good progress. Kaiser will be using the site for a $900M, 450-bed, 7-story, 565,000 SF hospital that is scheduled to open in 2017. It will be the first LEED-Gold certified hospital in California.

Jacobs Medical Center, the new 10-story $839M hospital on UCSD’s La Jolla campus, recently celebrated reaching its $131 million fundraising goal. The 245-bed facility has been under construction since 2012 and is scheduled to open July 2016. Scripps Health will open their new La Jolla cardiovascular tower in the spring and is also well underway with their 6-story, 175,000 SF medical office building next door, which is slated for 2016 delivery.

Tri-City Medical Center has taken back the Class A medical office building at the entrance to their Oceanside campus through eminent domain. They will likely put most or all of the building back on the market in the spring in hopes of leasing the vacancy to private practices in the community.

Ventas (VTR), a large public REIT headquartered in Chicago with a market cap of just under $26B, recently announced its closing on the acquisition of American Realty Capital Healthcare Trust (HCT) for $2.6 Billion. The portfolio totals 147 properties including 78 medical office buildings ($1.0B in value), 46 senior housing projects ($741M) and post-acute care facilities, hospitals and land. The overall cap rate was 6.3%. In a smaller but similar transaction, NorthStar Realty Finance (NRF) acquired Griffin-American Healthcare REIT II – a 289-property portfolio – for $4.0B in December.

Rady Children’s Hospital has named Dr. Donald Kearns president and CEO, replacing Kathleen Sellick, who retired. Dr. Kearns practiced for more than 25 years as a pediatric ENT for Rady Children’s and has since held multiple leadership and executive positions.

Sharp Grossmont Hospital has Scott Evans as CEO and Senior VP. Evans came from a 16-year career at USC, most recently as CEO of Keck Hospital of USC and the USC Norris Cancer Hospital.

Project /Address Buyer / Seller SF Price / Sale Date Cap Rate Leased

at TOS Price per SF

Genesee Plaza 9333-9339 Genesee Ave., San Diego

B: Polidev Investments Inc

S: DivcoWest JV Stockbridge

161,184 $72.0MM

12/18/14 6.19% 91.4%

$447

Pomerado Medical Dental Center (portfolio of condos) 15525 Pomerado Rd., Poway

B: Aranguren Family Trust

S: Osanc LP / Akimbo Inc 15,029

$6.0MM

9/8/14 8.0% 100% $399

Tenant Project/Address Class SF Term Start Rate ExecutionDate Increases Free

Rent TIA/SF Type

Confidential Torrey Reserve 11425 El Camino Real San Diego (DM Heights)

A 13,201 120 mos. $4.00 NNN 11/1/15 3% 1 month N/A New Deal

eStudySite Grossmont Medical Ctr 5565 Grossmont Ctr Dr. La Mesa

B 8,140 60 mos. $2.95 +E 8/31/2014 3% None $55.08 New Deal

Physiotherapy Associates Mesa Medical Plaza 7625 Mesa College Dr San Diego (Kearny Mesa)

A 3,099 72 mos. $3.05 NNN 8/19/2014 3% None $55.00 New Deal

Recently completed lease transactions

Recently completed sale transactions

Jones Lang LaSalle Americas Research • San Diego Medical Office Overview • Q4 2014 4

©2015 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.

TotalInventory

(sf)

Q4 Total net

absorption(sf)

YTDtotal net

absorption(sf)

YTD netabsorption

(% of inventory)

Directvacancy

(sf)

Directvacancy

(%)

Prior year direct

vacancy (%)

Average asking

rent ($ psf)

Prior year avg. asking

rent ($psf)

Oceanside/Vista 979,473 5,681 -5,493 -0.6% 147,297 15.0% 14.5% $2.36 $2.29

Escondido/San Marcos 939,148 1,152 -1,420 -0.2% 157,025 16.7% 16.6% $2.52 $2.54

North County Coastal 1,114,357 -6,738 -15,358 -1.4% 58,032 5.2% 3.8% $3.41 $3.30

I-15 Corridor 880,758 -9,675 7,775 0.9% 57,149 6.5% 7.3% $2.78 $2.72

La Jolla/UTC/Sorrento 1,274,553 23,559 46,932 3.7% 49,832 3.9% 7.6% $3.18 $3.00

Kearny Mesa/ Mission Valley 1,452,827 -11,519 -17,374 -1.2% 155,542 10.7% 9.5% $2.86 $2.34

Uptown/Hillcrest 1,022,397 -4,073 -11,999 -1.2% 129,889 12.7% 11.6% $2.54 $2.38

East County 1,612,403 9,032 12,035 0.7% 145,155 9.0% 9.7% $2.12 $2.09

South County 1,412,523 -338 -14,437 -1.0% 129,492 9.2% 8.1% $2.35 $2.38

Other 560,896 -5,545 3,404 0.6% 66,269 11.8% 12.4% $2.45 $2.30

Market Totals 11,249,335 1,536 4,065 0.0% 1,095,682 9.7% 10.9% $2.54 $2.48Vacancy: Physically vacant space. Total Vacancy includes both direct and sublease space. Availability: Space being marketed for lease by owner or sublessor, regardless of occupancy. Total Availability includes both direct and sublease space. Net Absorption: The net change in occupancy over a measured period of time. Average Asking Rent: Direct monthly values presented on a Full Service Gross basis, then weighted by the amount of direct available space in a building.

San Diego / Medical Office Statistics / Q4 2014

Sales Spotlight 2014 was another solid year for San Diego County medical office investment sales. A total sales consideration of $133 million was recorded on the year, which was lower than the record volumes posted in 2012 and 2013 but on par with those of the pre-recession years of 2007 and 2008, which combined for $215 million.

The rush of sales activity is continuing into 2015 and can be attributed to pent-up and increasing demand from buyers who seek the stability and growth potential of this product type, improving market conditions that are yielding more stable occupancy and aggressive underwriting assumptions, and attractive financing and capital markets.

I-15CORRIDOR

ESCONDIDOSAN MARCOS

OCEANSIDEVISTA

UTCSORRENTO MESA

LA JOLLA

KEARNY MESAMISSION VALLEY

OTHER

UPTOWNHILLCREST

EASTCOUNTY

SOUTH COUNTY

MEXICO

NORTH COUNTYCOASTAL

52

56

78

163

54

94

125

125

15

15

15

15

8

805

67

INTENATIONAL BORDERUSA

Scripps Memorial Hospital EncinitasScripps Green HospitalScripps Memorial Hospital La JollaScripps Mercy Hospital HillcrestScripps Mercy Hospital Chula Vista

Sharp Memorial HospitalSharp Grossmont HospitalSharp Coronado HospitalSharp Chula Vista Medical Center

UCSD Thornton HospitalUCSD Hillcrest Medical Center

Palomar Medical Center Palomar Health Downtown Campus Pomerado Hospital

Rady Children’s Hospital

San Diego

20

21

19

18

Alvarado Hospital Medical CenterParadise Valley Hospital

Tri-City Medical Center

Kaiser Permanente Medical Center

VA San Diego Medical Center

Naval Medical Center San Diego

18

20

19

21

SUBMARKET AND HOSPITAL LOCATIONS

JLL Healthcare Practice GroupHealthcare Real Estate Advisory | San Diego

Kelly Moriarty Associate 858-410-6359 kelly.moriarty@am.jll.com

Paul Braun Managing Director 858-410-6388 paul.braun@am.jll.com

Chris Ross Vice President 858-410-6377 chris.ross@am.jll.com

JLL expertise:

• Hospitals

• Health systems

• Academic medical centers

• Medical office buildings

• Surgery centers

• Large physician practices

• Public institutions

• Long-term care facilities

• Sole Practitioners

Who are we?The JLL Healthcare Practice Group has an exclusive specialization in medical office properties; it is all we do. Our team leverages 35+ years in healthcare real estate to assure optimal solutions and seamless transactions. No one else in San Diego can claim such extensive experience and knowledge when it comes to this unique sector of real estate.

Why does that matter to you?Your expertise is in delivering excellence in patient care. Ours is drastically reducing the time and stress associated with real estate transactions while identifying opportunities to help your organization or practice flourish. Your practice requires specific real estate considerations that general office users and even other providers do not.

When would you call us?• Lease Negotiations• Lease Renewals• Site Selection• Consolidations• Acquisitions & Dispositions• Advisory in Finance, Construction and Operations

San Diego Medical Office Report | Q4 2014

About Jones Lang LaSalleJones Lang LaSalle (NYSE:JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual revenue of $4.0 billion, Jones Lang LaSalle operates in 70 countries from more than 1,000 locations worldwide. On behalf of its clients, the firm provides management and real estate outsourcing services to a property portfolio of 3.0 billion square feet. Its investment management business, LaSalle Investment Management, has $47.6 billion of real estate assets under management. For further information, visit www.jll.com.