Sutter Health-Anchored San Francisco Bay Area Medical Office Building for Sale

Tuesday, February 13, 2018

Update: HFF announced the sale of this property along with the financing HFF arranged in July 2018. To search for current real estate investment listings, please click here.

HFF is marketing for sale the long-term leasehold interest in Physicians Medical Center (“PMC”), a three-story, purpose-built medical office building located immediately to the south of San Francisco in Daly City. The property features several highly sought after medical office investment characteristics, including two nationally recognized anchor tenants secured with long-term leases in a San Francisco MSA location with extremely high barriers-to-entry, exceptional demographics, proximity to two major hospitals and with some of the strongest medical office market fundamentals in the country.

Physicians Medical Center’s location at 901 Campus Drive puts it 15 minutes from both the Financial District and San Francisco International Airport and one mile from local hospitals, including the 357-bed Seton Medical Center (Verity Health) and the 120-bed South San Francisco Medical Center (Kaiser Permanente). With notable amenities that include excellent highway accessibility via Interstate 280 and State Roads 35 and ample parking, PMC is regarded as the preeminent medical office building in the area. PMC has attracted a diverse roster of high-acuity tenants, offering a full spectrum of medical services. Currently 92 percent occupied, Physicians Medical Center offers an investor a dependable in-place cash flow as well as value enhancement opportunities through lease up of vacant space and below market in-place rents.

San Francisco features one of the most dynamic economies in the country with more than 30 international financial institutions and six Fortune 500 companies, buoyed by an exceedingly educated workforce. The Bay Area hosts more than 35 colleges and universities containing some of the world’s most highly regarded institutions which, with numerous federal and private research centers, represent cutting-edge development in technology and the life sciences. Employment in San Francisco grew 20.4 percent from 2009 to 2016 compared to 10.6 percent nationally.

Medical Office Property for Sale Investment Highlights

  • Institutionally Anchored by Palo Alto Medical Foundation, Campus Surgery Center and Quest Diagnostics:  Physicians Medical Center is 92 percent leased to diversified and high-acuity healthcare provider tenants, anchored by the highly recognizable Campus Surgery Center (AmSurg/Envision Healthcare: NYSE: EVHC), Palo Alto Medical Foundation (Sutter Health – Moody’s: Aa3) and Unilab (Quest Diagnostics: S&P: BBB+), which together comprise 52 percent of the property’s rentable square footage and boast a weighted average remaining term of 7.2 years. In addition to superior credit and term, investors will realize a yield premium from PAMF’s larger suite contractual rent increase of 5.7 percent in 2019. Highly specialized spaces, combined with tenants that offer a wide variety of advanced cutting-edge medical services, have created the ideal medical office tenant roster.
  • Significant Value Enhancement Opportunity:  With an in-place occupancy of 92 percent and strong tenant interest, investors will have the opportunity to increase revenue by leasing the 5,719 square feet of vacant space in a medical office market that currently boasts a 97.5 percent occupancy rate. Marking rents to market will drive further value through rollover of space with below market in-place rents. Recent renewals at Physicians Medical Center suggest a landlord favorable market, with minimal tenant improvement allowances and new high watermarks for rental rates.
  • Rare San Francisco Area MOB Investment Opportunity along with Superior MOB and Market Fundamentals:  Of the top 25 major metropolitan areas in the country, San Francisco represents the most thinly traded medical office market. With over half of the medical office buildings owned by health systems within a 10-mile radius of Physicians Medical Center, landlords recognize the scarcity of product available in the market and have historically been long-term holders. San Francisco MSA is recognized as one of the strongest medical office markets in the country, evidenced in the fourth quarter by a new high watermark for rental rates and a 97.4 percent occupancy rate. The current asking rate represents an exceptional 20.2 percent increase from the year prior. With only 107,064 vacant square feet out of the 4.19 million square feet in the San Francisco medical office market, fundamentals are forecasted to remain robust. This exponential growth is spreading to the surrounding submarkets, including Daly City (97.5 percent occupancy rate), as tenants search for quality space in buildings that suit their requirements.
  • Irreplaceable Infill San Francisco Bay Area Location:  Strategically located just 15 minutes from both the Financial District and the San Francisco International Airport, Physicians Medical Center was developed in 1989 with a mission of delivering the highest quality healthcare services within the Daly City marketplace. The property benefits from a highly affluent ($111,356 AHHI) and expanding population of 172,700 within a three-mile radius, forecasted to grow by 5.1 percent from 2017 to 2022. Significant physical barriers to entry within San Francisco and the surrounding areas have subsequently led to minimal new deliveries as no multi-tenant medical office building has been constructed in over 25 years.

Physicians Medical Center offers investors the opportunity to acquire a generational San Francisco medical office in an infill location. For more information on this commercial property, please contact Evan KovacAndrew Milne or David Dokko. Click here for our real estate investment sales search page.

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