San Diego Medical Office Rents at All-Time High

Average asking rents for medical office buildings in San Diego are at a record, according to a second-quarter report from JLL. Over the past 12 months through June, the number has increased 2.2% to an average rate of $4.23 full-service gross (FSG) across all submarkets.

JLL said it expects to see selective conversion of traditional office space to medical use in San Diego, particularly in the Kearny Mesa and Sorrento Valley submarkets.

Total net absorption in Q2 was positive 28,982 square feet, countering the negative trend from earlier quarters. The rebound was primarily driven by strong performance in the North County Coastal and Oceanside submarkets, which combined for 40,157 square feet of positive absorption.

San Diego Sees Employment Growth

The strong results come after the sector enjoyed 3.4% year-over-year employment growth.

“This employment expansion reflects broader industry trends, as the Advisory Board projects substantial healthcare utilization growth driven by an aging population and increasingly complex medical needs,” Ben Schiesl, vice president with JLL’s Healthcare Practice Group, told GlobeSt.com.

Specifically, patients aged 75 and older are expected to drive 43% volume growth in outpatient services over the next decade, creating unprecedented demand for medical office space, he said.

Simultaneously, construction economics have fundamentally shifted, creating additional upward pressure on rents.

“Elevated interest rates have significantly increased the cost of capital for medical office development, forcing developers to underwrite higher rental rates to achieve acceptable returns on investment,” Schiesl said.

“Construction costs have surged due to persistent inflation in materials like steel, concrete, and specialized medical building components, while skilled labor shortages have driven up wages for trades workers essential to medical office construction. These factors have made new medical office development increasingly expensive, with developers requiring higher rental rates to justify project feasibility.”

The supply-demand imbalance is further exacerbated by historically low vacancy rates of 6.4% and severely limited new construction, with only 146,775 square feet currently under development across the entire market, most of which has been pre-leased, according to JLL.

This constrained supply pipeline reflects developers' reluctance to commence speculative medical office projects given current construction economics, “creating a feedback loop where limited supply supports higher rents, which in turn helps justify future development at elevated cost structures,” Schiesl said.

“Medical tenants are increasingly demanding move-in-ready clinical spaces to minimize their own capital expenses and accelerate occupancy timelines, placing premium value on quality medical office inventory and supporting landlords' ability to command record rental rates.”

Kearny Mesa and Sorrento Valley Strategically Positioned

Kearny Mesa and Sorrento Valley align with healthcare industry transformation patterns and local market fundamentals, making them a compelling conversion opportunity, according to the report.

“These submarkets are strategically positioned to capitalize on the massive outpatient growth wave, as outpatient volumes increase and inpatient volumes decline,” Schiesl said.

“Critically, these areas offer significant conversion opportunities due to higher vacancy rates in obsolete traditional office buildings and underutilized life science/R&D facilities compared to the constrained medical office market.”

While medical office vacancy remains historically low, these submarkets contain substantial inventory of convertible office and lab space facing structural obsolescence, creating attractive acquisition opportunities without the elevated costs of ground-up development.

The areas benefit from proximity to major hospital systems and established medical corridors, providing physicians with access to referral networks critical for ambulatory care expansion.

Schiesl said. “Many existing buildings within these areas offer adequate parking infrastructure or a path toward creating necessary parking, along with favorable zoning (in specific pockets) that are essential components for medical office operations and particularly attractive to institutional investors seeking to accommodate healthcare providers.”

Economic Headwinds Could Affect Expansion

Meanwhile, economic uncertainty along with policy changes regarding medicaid cuts from the One Big Beautiful Bill Act — could cause headwinds in the market, he warned.

The projected 16 million increase in uninsured Americans and $731 billion in estimated reimbursement reductions could force providers to delay practice expansions or consolidate locations.

Changes in healthcare delivery models, such as accelerated telehealth adoption, could reduce demand for traditional medical office space, Schiesl said.

But “If construction costs moderate and lending conditions improve, increased speculative medical office development could add supply and stabilize rent growth at more sustainable levels,” Schiesl countered.

San Francisco Medical Healthier Than Office

Moving North of California to the San Francisco Bay Area, the region, while healthy compared to the general office market, has slowed in 2025 compared to 2024, according to Ed Del Beccaro, EVP, San Francisco Bay Area manager of TRI Commercial Real Estate Services/CORFAC International.

He told GlobeSt.com that this is due to medical users, particularly hospital and university medical systems, exercising caution following recent federal and state budget cutbacks.

“The result is that vacant medical space is sitting vacant longer on the market, rents are stable but not really increasing unless it is prime clinic space, and free rent is again being offered by landlords,” Del Beccaro said.

“Medical tenant Improvement costs, however, continue to rise. New development is limited because of inflation and rising construction costs.”

Looking at the nine counties that comprise the San Francisco Bay Area, per CoStar, the vacancy rate is 9.8% and the market asking rent per square foot is $41.68.

Trask Leonard, president and CEO of Bayside Realty Partners, a San Francisco brokerage that is leasing a medical pavilion at 939 Ellis Street, said the market is witnessing a recent tick-up in leasing demand for higher-quality medical office buildings in San Francisco.

“In particular, our research shows that as of the end of the second quarter 2025, overall medical office vacancy in the San Francisco market has decreased from a high of 14% in 2022 to 12%, representing 56,000 square feet of net absorption,” Leonard told GlobeSt.com.

“Medical providers are seeing increased population and job numbers in the city, dramatically increased apartment rents, and a marked improvement in everyday conditions.”