North County Takes the Lead in Developing New Medical Space

NextMed Group is a bit of a rarity. The Carlsbad firm 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 in general is the epicenter of San Diego County medical projects, with construction of new medical space under way by Kaiser Permanente, Palomar Health and Tri-City Medical Center.

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.”

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

“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.”

The result is that physicians may end up selling their practices to hospital systems or big medical companies.

“Our vision has been to deliver a premier facility for some of our region's top physicians. In doing this, patients in our community are provided with better, direct access to best-in-class medical care,” Leggett said.

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, according to Leggett.

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, which they subsequently enlarged and redeveloped in 2016 into a 20,000-square-foot medical building, Leggett said.

“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, renovating a 39,000-square-foot general office building into a surgery center and medical offices, gutting the interior and expanding the building to 43,000 square feet.

Unmet Need

While demand for medical office space in San Diego County is high, the 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 the fourth quarter of 2022, less than 100,000 square feet 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.”

Ross of JLL said that for now, he expects to see more medical space come from converting office space to medical than ground-up construction.

“Speculative development is for the foreseeable future going to be very, very difficult except in small doses,” Ross said. “It's hard to envision anything new breaking ground outside of a hospital doing something on their own campuses.”

On Track

By far, the biggest ongoing medical construction project in San Diego County is just that, a hospital project - Kaiser Permanente's $403.3 million hospital in San Marcos. The seven-story San Marcos Medical Center is on schedule and on budget, said Max Villalobos, Kaiser Permanente chief operating officer for North County.

Villalobos said that construction was nearly finished by the end of January.

“By the end of April, the construction will be done, and we'll get the keys but then it will take four to six months to get the hospital ready,” Villalobos said.

That includes hiring people to work in the hospital, stocking it with supplies and complying with regulatory requirements.

“Our team has done a tremendous job, especially with some of the supply chain challenges,” Villalobos said, adding that some materials and equipment was bought up to a year before it was needed.

“It has really paid off,” Villalobos said. The new hospital will have 206 private rooms, eight operating rooms and a 39-bay emergency department.

Designed to meet LEED gold standards for energy efficiency, 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 the 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, Villalobos said.

Tri-City

Although nowhere near the scale of Kaiser's San Marcos hospital project, Tri-City Medical Center in partnership with San Diego County is building a much-needed $27.6 million psychiatric care center on the campus of Tri-City's Oceanside hospital.

The psychiatric health center will offer short-term treatment for patients after they've received initial care at a hospital emergency room or crisis stabilization unit.

The one-story building will be at the northwest corner of the Tri-City Medical Center site at 4002 Vista Way, covering nearly 3.8 acres of the 35.6acre campus.

The center will include patient rooms, administrative offices and a nurses' station.

“The project is currently in the grading stage of construction,” said Aaron Byzak, chief external affairs officer of Tri

City Medical Center.

“Despite the recent inclement weather, we still anticipate an early 2024 opening for this very important community resource,” Byzak said.

Tri-City also is about to start work on a redesign and remodeling of the hospital emergency room.

“This nearly $5 million remodel will transform the waiting room, triage and one of three major treatment areas of the emergency room into a modern, welcoming environment with a goal of reducing wait times and improving the patient experience,” Byzak said.

Palomar Project

Escondido will be home to a new $100 million mental health hospital planned as a joint venture between Palomar Health

and Kindred Behavioral Health,

a unit of LifePoint Health.

Palomar and LifePoint have also collaborated on a 52-bed rehabilitation center on the campus of Palomar Medical Center in Escondido that treats people recovering from stroke, brain injuries and other muscular-skeletal problems.

Palomar also is completing a three-building medical office complex on the campus of Palomar Medical Center Escondido.

“They finished one four years ago, another one 18 months ago,” Ross said. “They're close to filling up their second one. In terms of commitment, they're pretty well committed on the second building and they're looking for different uses on the third building.” ■