The average asking rent for medical office buildings in San Diego has reached a record high, according to a JLL report, reflecting Q1 2025.
Prices climbed by $0.12 per square foot (sf) over the past 12 months to an average rate of $4.28 per square foot (FSG) across all submarkets.
That came even as San Diego’s vacancy rate for medical office buildings increased from 5.7% to 6.0% during the past 12 months. Move-out activity totaled -67,719 square feet, primarily driven by Palomar Pomerado Health vacating 17,000 square feet in San Marcos. Particularly, the Scripps campus in La Jolla and at Grossmont Medical Center in La Mesa experienced some vacancies.
Medical office building construction in San Diego is expected to remain subdued due to elevated construction costs, developers’ need for higher returns in an increasingly inflationary environment and volatile capital markets.
Additionally, the report said, tenants’ desire to control occupancy costs, among other persistent headwinds, is playing a factor.
Supply Severely Constrained
“The primary driver behind record-high asking rents in the San Diego medical office market is a severely supply-constrained environment,” Kelly Moriarty, JLL's executive vice president, told GlobeSt.com.
“We've seen a multi-year period of limited new construction, coupled with a continual shrinking of available built-out medical office space. This 'flight to quality' among healthcare providers seeking modern, efficient spaces has consistently put upward pressure on rents.
“Furthermore, escalating construction costs are a significant contributing factor. Medical office owners are forced to underwrite substantially larger improvement allowances to keep pace with the rising expenses of building out medical space, which ultimately translates into higher asking rents.”
Negative absorption is occurring, but it’s slightly misleading, Moriarty said.
“In this case, it is crucial to understand the nuances,” he said.
“Reported negative absorption is primarily attributable to increased vacancy in a very small number of buildings—specifically, three out of the total inventory.
Given how extraordinarily tight vacancy has been in the medical office sector for an extended period, even a minor increase in a handful of buildings can appear statistically significant — but still that does not reflect a softening market in this case, according to Moriarty.
“As advisors to the healthcare community, we see firsthand the robust growth intentions of health systems, large medical groups, and private practices throughout San Diego County. Landlords with high-quality second-generation medical spaces, strategically developed suites, or the financial means to fund tenant improvements in prime locations are well-positioned for success.”
JLL suggested that the Kearny Mesa/Mission Valley submarkets are poised for growth, with expectations of positive absorption and upward pressure on rental rates.
Activity has surged there, primarily driven by healthcare providers seeking expansion opportunities or relocating from adjacent submarkets such as UTC and Hillcrest.
Tariffs, Construction Costs a Hindrance
Rising construction material prices are another key factor in this market.
“During the COVID-19 pandemic and for a significant period afterward, supply chain disruptions represented the primary catalyst for widespread increases in construction material costs across the board,” Moriarty said.
“Today, the landscape has shifted, and we're facing considerable uncertainty stemming from potential tariffs, which could further inflate prices for a vast array of goods and materials essential for construction.”
Beyond these national and international factors, California presents unique challenges to development opportunities, he added.
“Unfortunately, without a significant easing of building restrictions at the state or local level, a drastic shift in global supply chain fundamentals, or a favorable resolution to tariff policies, there are currently no indications that construction material pricing will decrease enough to meaningfully spur new medical office development in the near future.
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