Local medical office market holds steady as rents rise, office conversions expand

San Diego's medical office market remained resilient in the second quarter, with rising rents, steady vacancy and continued demand for outpatient space, according to the latest report from the real estate brokerage JLL.

Medical office asking rents rose 5.7% from a year earlier to $4.47 per square foot, while the direct vacancy rate held at 6.5%. The market had 14.7 million square feet of inventory and 132,800 square feet under construction, the report said.

The sector recorded 64,269 square feet of net absorption during the past 12 months. Gross leasing activity in the second quarter totaled 106,088 square feet, up from the previous quarter and slightly above the five-year quarterly average of 98,074 square feet, according to JLL.

The average lease size was 4,605 square feet, indicating demand remains concentrated in small- to mid-sized medical suites.

Suburban medical office submarkets continued to outperform, fueled by the ongoing shift toward outpatient care. JLL said much of the quarter's move-out activity involved traditional office tenants whose former space is being converted for medical use.

With new medical office construction still limited, conversions of traditional office space have become an important source of new clinical facilities, the brokerage found.

A change to San Diego's 2026 Land Development Code could expand those opportunities. Medical office use is now permitted on all lots within the Carmel Valley Employment Center, an office district in Carmel Valley and Del Mar Heights along El Camino Real. Previously, medical use was limited to two lots.

The change gives medical providers access to established coastal office properties in a submarket where medical space remains tight. JLL said parking availability and individual owner strategies are likely to determine how much of the office inventory is converted.

Although the properties are in a transit priority area and can technically be occupied entirely by medical users without required parking stalls, practical parking demand remains a consideration, JLL said. Most buildings have a parking ratio of about four spaces per 1,000 square feet.

JLL expects only a select number of Carmel Valley buildings to be converted to medical use during the next decade, particularly properties facing significant vacancy and capable of attracting major health care users.

Owners of medically permitted second-generation office space also face challenges. Clinical tenants generally are unwilling to absorb the cost and time required to convert traditional offices into medical facilities, leaving some space vacant longer than expected, according to the report.

JLL expects institutional landlords to respond with speculative medical buildouts, providing finished clinical suites to attract tenants actively searching for space.

Class A medical office rents continued to reach record levels, driven largely by properties in University Town Center, Del Mar Heights and North County Coastal.

Recent leases included 9,198 square feet for behavioral health space in Oceanside at $1.85 per square foot; an 8,416-square-foot primary care facility in Escondido at $2.30; a 7,924-square-foot orthopedic facility in Kearny Mesa at $2.75; and a 6,154-square-foot clinical trials facility in the College Area at $2.55.

JLL said investment activity remained selective, with owner-users and medical office condominium conversions accounting for much of the activity.

One notable second-quarter transaction was the $18.3 million acquisition of RB Medical Plaza at 11770 Bernardo Plaza Court in Rancho Bernardo. The buyer, Compass Capital Investments, plans to convert the property into condominiums and sell the individual suites to owner-users.

Other second-quarter sales included a 31,401-square-foot medical office building at 4510 Viewridge Ave. in Kearny Mesa, which sold for $7.9 million; and a 3,294-square-foot medical office suite at 700 Garden View Court in Encinitas, which sold for $2.31 million.

Overall, JLL said the San Diego medical office market continues to benefit from durable demand for outpatient health care, limited new construction and the growing conversion of traditional office properties into clinical space.