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SAN DIEGO—The Q2 surge in San Diego's medical-office rental rates is directly correlated to a limited supply of available space, allowing landlords to simultaneously push rents and reduce concessions, Cushman & Wakefield's senior director in the healthcare-practice group Travis Ives and associate in the healthcare-practice group Joe Zurek tells GlobeSt.com. According to the firm's Q2 medical-office report for San Diego, average asking rent countywide for medical-office space rise 2.3% in Q1 and 7.1% from the year before to $3.17 per square foot.

Ives and Zurek say the steady demand for medical space over the past several years has dropped vacancies to single digits in nearly every market, and the shifting dynamics of how healthcare is delivered will cause a substantial amount of dated medical-office space to become obsolete. This trend, coupled with the shrinking availability of modern medical-office space, will continue to drive rents upward. “There is a very strong support level at current rents, but rental growth will be limited by healthcare providers' ability to pay for more expensive space as their margins continue to become compressed,” the pair say.

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The majority of new medical-office space development has been pre-leased build-to-suit projects for major medical players in San Diego, with little speculative space available to the general market, Ives and Zurek explain. “Until truly speculative medical-office development begins to take place, we do not expect the current levels of development to significantly affect rental rates.”