The Best & Worst Investments for San Diego Commercial Real Estate in 2026

by Maurice Bedard | May 7, 2026 | San Diego County

San Diego County’s commercial real estate market in twenty twenty-six presents a tale of two cities.

While opportunities exist to generate substantial returns, investors must navigate carefully through a landscape marked by dramatic sectoral differences.

Commercial real estate investment activity nationwide is projected to increase by sixteen percent in twenty twenty-six to five hundred sixty-two billion dollars, nearly matching pre-pandemic annual averages, according to CBRE.

San Diego’s market mirrors this recovery with specific asset classes offering compelling value plays while others demand extreme caution.

This report examines where disciplined investors can deploy capital effectively in twenty twenty-six, backed by current market data, real transaction examples, and expert analysis from industry leaders including CBRE, JLL, Kidder Mathews, and Marcus and Millichap.

Industrial Real Estate: The Power Play in South County

Industrial properties in San Diego County present one of the strongest investment opportunities for twenty twenty-six, particularly in South County and Otay Mesa submarkets. Despite recent vacancy increases, fundamentals remain attractive for long-term value creation.

The industrial market posted two hundred fifty thousand square feet of positive direct net absorption in first quarter twenty twenty-six, a significant improvement from negative five hundred forty-six thousand square feet recorded one year ago.

Landlords responded aggressively in twenty twenty-five by lowering rental rates and increasing concessions, resulting in over six hundred thirty thousand square feet of positive absorption in fourth quarter twenty twenty-five.

San Diego industrial properties currently average three hundred seven dollars per square foot, down from three hundred forty-seven dollars per square foot one year ago, indicating buyers remain active but more price-sensitive.

This pricing correction creates entry opportunities for investors with conviction in long-term fundamentals.

The Otay Mesa Advantage

Otay Mesa represents the most compelling industrial investment opportunity in San Diego County. Major institutional investors including Hines have committed substantial capital to this submarket, validating the long-term thesis.

Hines purchased Brown Field Technology Park for one hundred thirty-eight million dollars, renamed it Britannia Technology Park, and acquired an additional ten acres on Otay Mesa Road for seventeen million dollars to develop a one hundred seventy thousand square foot industrial building.

This transaction demonstrates institutional confidence in the submarket despite broader market softness.

Two additional major industrial parks remain under construction. Kearny Real Estate expects to complete the ninety million dollar Otay Crossings Commerce Park, while Elevation Land has started leasing space in the one hundred nineteen acre Otay Business Park developed in partnership with Crow Holdings.

The Elevation Land Crow Holdings project represents one of the largest industrial developments in Southern California, encompassing one point eight million square feet across the entire site with six hundred twelve thousand square feet in the first four buildings.

Otay Mesa offers strategic advantages that justify premium valuations. The submarket sits adjacent to California’s largest commercial land port of entry with more than thirty-eight billion dollars in annual trade, features Cross Border Express pedestrian crossing to Tijuana International Airport, and provides access to a capable binational workforce.

The location is strategically positioned closer to downtown San Diego and Lindbergh Field Airport at approximately twenty miles than any other major San Diego industrial area.

South County represents sixteen percent of the total San Diego industrial market of one hundred eighty-eight point eight-five million square feet yet is expected to capture increasing share of annual absorption due to severe land constraints in other San Diego areas.

Cap Rates and Return Expectations

Industrial cap rates in San Diego have risen to a range of five percent to six percent, with mid-bay and small-bay properties witnessing cap rates in the low five percent area.

This compression from historic lows creates opportunities for value-add investors to drive net operating income growth through operational improvements and lease-up strategies.

Current vacancy stands at nine point six percent in first quarter twenty twenty-six, up one hundred thirty basis points year-over-year, while availability climbed to thirteen percent.

CBRE upgraded its twenty twenty-six national industrial leasing volume forecast to more than one billion square feet, which would be the strongest year on record, driven by third-party logistics providers and manufacturing.

Multifamily: Navigating Oversupply While Capturing Long-Term Value

The multifamily sector presents a nuanced opportunity requiring careful submarket selection and realistic underwriting. San Diego demonstrates what happens when a city facilitates development through streamlined permitting and clear general plans.

San Diego is building apartments at nearly twice the rate of Los Angeles, with new construction up ten percent while Los Angeles construction plummeted thirty-three percent over three years.

San Diego County’s apartment pool is expanding at nearly double the rate of Los Angeles and other major California city clusters. This construction momentum reflects San Diego’s streamlined permitting, clear general plan, and absence of traditional rent control, making it easier for developers to build.

San Diego’s multifamily vacancy rate increased to five point four percent in first quarter twenty twenty-six, up fifty basis points year-over-year, signaling mild softening as new supply delivers. Average asking rents average two thousand four hundred seventeen dollars per unit, remaining flat year-over-year, reflecting rent stability despite rising vacancy.

Nationally, the multifamily vacancy rate fell by twenty basis points in first quarter twenty twenty-six from fourth quarter twenty twenty-five to four point eight percent as net absorption outpaced construction completions for the first time in three quarters.

Average monthly rent increased by zero point two percent year-over-year and zero point four percent quarter-over-quarter to two thousand two hundred seventeen dollars.

San Diego’s vacancy of five point four percent represents the highest level since two thousand nine. However, this must be contextualized against the addition of thirteen thousand units over the past three years while vacancy remained in the low four percent band, demonstrating resilient demand.

San Diego’s twenty-to-thirty-four-year-old demographic faces significant homeownership barriers due to elevated housing prices. The median household income of ninety-five thousand six hundred forty-four dollars provides context for rent absorption and tenant demand across multifamily assets.

This younger renter pool unable to access homeownership creates steady multifamily demand.

Pricing and Cap Rate Environment

Multifamily sales volume decreased for three consecutive quarters in twenty twenty-five, reaching five hundred seventy-five point four million dollars in third quarter versus seven hundred thirty-three point six million dollars in second quarter and seven hundred ninety-three point three million dollars in third quarter twenty twenty-four.

Per-unit values dropped twenty-three percent in fourth quarter twenty twenty-five compared to the prior year.

This pricing reset creates acquisition opportunities for patient capital. San Diego multifamily cap rates have historically remained compressed, with average cap rates at four point six percent and just four point four percent for four-star to five-star properties.

While recent market softness has expanded cap rates modestly, San Diego continues to trade at premiums relative to national averages due to supply constraints and demographic fundamentals.

North County Coastal and Strategic Submarkets

The North County Coastal region presents compelling multifamily opportunities. The area has seen significant demand for multifamily properties driven by coastal charm and appeal of a relaxed, family-friendly lifestyle. Benefits of owning multifamily property in San Diego include consistent rental income and long-term appreciation.

Operators are strategically prioritizing occupancy over rent growth, supported by strong renewals.

Historically strong renewal rates at fifty-seven percent of all leasing activity, up from fifty-one percent in twenty fifteen and forty-eight percent in two thousand five, are expected to increase further in twenty twenty-six

This strategy preserves occupancies by offering new tenants certain discounts while maintaining cash flow from existing resident base.

Success Story: North Park Multifamily Investment

A renovated North Park Spanish-style bungalow complex recently traded with a five point four-nine percent cap rate at three million seven hundred thousand dollars for a four thousand five hundred sixty-two square foot apartment building.

The property features modern interiors, private yards, in-unit laundry, solar panels, accessory dwelling units, and strong rental upside potential.

This transaction demonstrates investor appetite for well-located, value-add multifamily assets with upside potential through operational improvements.

Retail: Selective Opportunities in High-Traffic Locations

The retail sector demands surgical precision in twenty twenty-six. Overall fundamentals show softening, but premier locations with experiential components continue to command investor interest.

San Diego retail vacancy increased to four point six percent in first quarter twenty twenty-six, up fifty basis points year-over-year.

Average asking rent reached two dollars and forty-four cents per square foot per month, a two point two-seven percent year-over-year increase. Net absorption turned deeply negative at negative two hundred fifty-one thousand five hundred twelve square feet, reflecting declining tenant demand.

Construction activity held steady with under-construction space totaling three hundred four thousand eight hundred five square feet, showing a slight one point one-two percent year-over-year increase. New deliveries fell sharply to five thousand four hundred eleven square feet, a ninety-three point one-five percent year-over-year decline.

San Diego’s retail market ended twenty twenty-five with its highest availability rate since twenty twenty-one at five point two percent, just below the ten-year average. Over one point three million square feet was added to the leasing market in twenty twenty-five, the most in a calendar year in the past decade.

Waterfront and Mixed-Use Success

Despite broader market challenges, premier waterfront retail assets continue to attract capital. JLL arranged the thirty-four point eight-seven-five million dollar sale of The Headquarters at Seaport, a seventy-three thousand eight hundred twenty-three square foot open-air shopping center in San Diego’s Marina District.

The property is strategically positioned at seven hundred eighty-nine West Harbor Drive, directly adjacent to the Manchester Grand Hyatt San Diego with one thousand six hundred twenty-eight rooms and the city’s largest conference facilities.

This prime waterfront location provides access to downtown San Diego’s entertainment, dining, and nightlife district, serving both local residents and millions of annual visitors. The property is situated within the future Seaport Village redevelopment and across from the new one point six million square foot IQHQ life science campus.

The transaction demonstrates that experiential retail in high-traffic, amenity-rich locations commands premium valuations despite sector headwinds. Investors should focus on irreplaceable locations with entertainment and dining components that drive foot traffic.

University Town Center Expansion

Westfield University Town Center continues evolving into one of San Diego’s premier lifestyle destinations with future expansion plans including luxury retail additions, new dining experiences, entertainment spaces, and expanded mixed-use components.

Located in the heart of La Jolla University City, University Town Center has seen major growth in both residential and commercial development.

Retail investments tied to major mixed-use developments in established submarkets offer downside protection through diversified tenant bases and experiential components that cannot be replicated online.

Office Market: The Sector to Avoid

The San Diego office market represents the highest-risk asset class for investors in twenty twenty-six. Structural challenges including elevated vacancy, massive sublease inventory, and work-from-home permanence create substantial downside risk.

San Diego’s office vacancy fell twenty basis points quarter-over-quarter to fourteen point three percent in first quarter twenty twenty-six, supported by modest positive demand of sixteen thousand two hundred thirty-one square feet.

However, metro vacancy increased forty basis points year-over-year. Availability moved higher for a third consecutive quarter to nineteen point five percent.

Downtown San Diego: The Epicenter of Distress

Downtown San Diego represents the most challenged office submarket with catastrophic vacancy levels.

The sixteen million square foot downtown market recorded a thirty-five point eight percent vacancy rate in fourth quarter twenty twenty-five.

This compares to the overall San Diego office market vacancy of fourteen point one-two percent, nearly four hundred basis points above pre-COVID levels of ten point one-three percent in fourth quarter twenty nineteen.

Downtown San Diego’s vacancy rate tops thirty-five percent with an average asking rental rate of two dollars and forty-seven cents per square foot, representing the highest vacancy percentage among the nation’s major central business districts. A nearly two thousand basis point disparity exists between downtown and suburban vacancy rates.

The Irvine Company’s rapid exit from downtown San Diego exemplifies the distress. Irvine Company sold One America Plaza, San Diego’s tallest office tower, in a one hundred twenty million dollar deal to Sacramento’s Saca Development.

The five hundred seventy thousand square foot building valued at approximately two hundred ten dollars per square foot represents a massive loss from the close to three hundred million dollars Irvine Company paid in two thousand six.

This marks the sixth reported office tower sale for Irvine Company in downtown San Diego since late twenty twenty-four, concluding the Newport Beach firm’s rapid exit from a now-struggling office market where it had been the dominant landlord for two decades.

While One America Plaza counted a thirteen percent vacancy rate at time of sale, the broader downtown market faces structural challenges that will take years to resolve. In twenty twenty-six, a lack of urban deliveries and the conversion of a vacant high-rise into apartments could help reduce vacancy modestly.

Suburban Office: Mixed Performance

Suburban office markets demonstrate more manageable fundamentals with collective vacancy around fourteen percent. Like the central business district, suburban submarkets have registered an uptick in Class A leasing, with demand for high-quality office space most improved north of San Diego proper along Interstate five.

The flight-to-quality among certain tenants is expected to continue in twenty twenty-six, along with a significant pullback in local office construction. This will play a role in the metro’s overall vacancy rate compressing for the first time in five years.

JLL signed a new lease at La Jolla Commons III, a premier Class A office tower at four thousand seven hundred twenty-seven Executive Drive in University Town Center. The firm’s relocation demonstrates tenant preference for premier office space with abundant onsite and nearby amenities in established submarkets.

However, sublease availability exceeds two point two million square feet, a lingering effect of corporate downsizing and the continued shift toward hybrid work models. Sublease inventory is most concentrated in suburban nodes such as University Town Center and Sorrento Mesa, as well as downtown San Diego.

Life Science: The Minefield

Life science represents the single most dangerous investment sector in San Diego County for twenty twenty-six. Catastrophic overbuilding has created unprecedented vacancy levels that will require years to absorb.

At the end of twenty twenty-five, the vacancy rate for life science space in San Diego County reached twenty-nine point eight percent according to JLL.

Central San Diego availability and vacancy rates have risen dramatically over the past four years, increasing from historic lows of four point two percent availability and two point two percent vacancy in third quarter twenty twenty-one to near record highs of twenty-seven point five percent availability and twenty-two point four percent vacancy.

Total vacancy rose to twenty-six point six percent in first quarter twenty twenty-six, up from twenty-one percent one year ago. Net absorption turned negative for the quarter, posting one hundred forty-one thousand four hundred forty-three square feet in losses.

Asking rents in core submarkets fell to five dollars and thirty cents per square foot, down five point two percent over the past year.

More than half of the life science space delivered between twenty twenty and twenty twenty-five remains empty, creating challenges for landlords. Nationally, United States life sciences lab vacancy climbed to twenty-three point two percent in first quarter twenty twenty-six as negative net absorption and declining rents offset record biotech employment and seven point four billion dollars in venture capital funding.

Sublease Tsunami

Sublease availability represents a massive overhang on the market. Sublease availability fell to one point five million square feet from last year’s high of one point nine million square feet, but still represents six point nine percent of existing inventory, far higher than the historical average. Sorrento Mesa is home to more than half of this sublease space with the submarket’s sublease availability rate at nine point nine percent.

Despite the large amount of available sublease space on the market, there were only six transactions in twenty twenty-five, five of which were under six thousand square feet in size. This demonstrates profound lack of demand even at distressed pricing.

Twenty twenty-five leasing activity totaled nearly one point one-four million square feet, twenty percent below the ten-year average but in line with historical pre-COVID norms. However, this modest activity provides little relief given the scale of available space.

Development Pipeline Adds Pressure

New life science development continues despite catastrophic vacancy. Alexandria Real Estate Equities broke ground on a build-to-suit project for Novartis in February twenty twenty-six with completion scheduled for twenty twenty-nine. University of California San Diego Science Research Park Phase Two features three hundred fifty thousand square feet available in twenty twenty-nine.

This ongoing development pipeline will further pressure fundamentals. Investors should avoid life science assets entirely until vacancy falls below fifteen percent and absorption turns consistently positive for at least four consecutive quarters.

Where to Deploy Capital: The Investor’s Playbook

Based on comprehensive market analysis, investors should prioritize the following strategies for twenty twenty-six.

Tier One Opportunities: Industrial in South County

Allocate primary capital to industrial properties in Otay Mesa and South County submarkets. Target well-located distribution and logistics facilities within five miles of the Otay Mesa Port of Entry. Underwrite to current market rents of one dollar and forty-one cents per square foot with minimal rent growth assumptions.

Accept going-in cap rates in the five percent to six percent range for institutional-quality assets with credit tenancy. Focus on buildings with clear height of at least thirty feet, modern dock configurations, and access to major transportation corridors. Properties with potential for manufacturing users benefit from nearshoring trends and United States Mexico Canada Agreement dynamics.

Industrial leasing is forecast to rise to more than one billion square feet nationally in twenty twenty-six, the strongest year on record. San Diego industrial fundamentals will strengthen through twenty twenty-six into twenty twenty-seven as vacant industrial property in South County is absorbed.

Tier Two Opportunities: Value-Add Multifamily

Pursue value-add multifamily opportunities in North County Coastal, North Park, and established urban submarkets with strong demographics. Target properties with deferred maintenance, below-market rents, or operational inefficiencies that can be corrected through professional management and modest capital investment.

Underwrite to current market rents of two thousand four hundred seventeen dollars per unit with zero to two percent annual rent growth over the first three years. Structure acquisitions at cap rates of five percent to six percent, representing a spread to the historic four point four percent to four point six percent range.

Prioritize properties near University of California San Diego, San Diego State University, and major employment centers that attract the critical twenty-to-thirty-four-year-old demographic facing homeownership barriers.

Avoid new construction competing with lease-up inventory and focus on assets built between two thousand and two thousand fifteen requiring light renovation.

Tier Three Opportunities: Experiential Retail

Selectively pursue grocery-anchored retail, waterfront retail, and entertainment-focused properties in irreplaceable locations. Focus on centers with strong household incomes above one hundred thousand dollars within a three-mile radius and diverse tenant mixes that drive consistent foot traffic.

Underwrite conservatively with ten to fifteen percent vacancy assumptions and minimal rent growth. Target properties trading at seven percent to eight percent cap rates with credit anchor tenancy and long-weighted-average-lease terms.

Properties adjacent to high-density multifamily developments or major mixed-use projects offer superior downside protection.

The Headquarters transaction at approximately four hundred seventy-two dollars per square foot demonstrates that premier waterfront retail commands significant premiums. However, most retail assets will trade at material discounts to replacement cost given sector headwinds.

Markets to Avoid: Capital Preservation Through Discipline

Disciplined investors recognize that avoiding losses is equally important as capturing gains. The following sectors and submarkets present unacceptable risk-adjusted returns for twenty twenty-six.

Avoid: Downtown San Diego Office

Downtown San Diego office represents the single worst investment opportunity in the county. Thirty-five point eight percent vacancy, massive sublease inventory, and structural demand destruction from permanent work-from-home adoption create no credible path to stabilization.

Pricing has already declined dramatically as evidenced by One America Plaza trading at two hundred ten dollars per square foot after selling for over five hundred dollars per square foot in two thousand six. Further declines are likely as debt maturities force additional distressed sales.

Even at distressed pricing, downtown office assets face years of negative cash flow, capital calls for tenant improvements and leasing commissions, and uncertain exit valuations. The sector requires complete avoidance until vacancy falls below twenty percent and employment fundamentals demonstrate sustainable recovery.

Avoid: Life Science Across All Submarkets
Life science assets across all San Diego submarkets should be avoided entirely. Twenty-six point six percent total vacancy, one point five million square feet of sublease space, and ongoing development pipeline create a multi-year absorption challenge.

Falling rents down five point two percent year-over-year and negative net absorption demonstrate deteriorating fundamentals. The sector experienced a speculative development boom that dramatically outpaced demand growth, and the correction will be prolonged and painful for landlords.

Even distressed life science assets present challenges as specialized laboratory infrastructure limits alternative uses and tenant improvement costs for new users can exceed one hundred dollars per square foot. Conversion to conventional office faces the same demand challenges plaguing that sector.

Avoid: Suburban Office with Elevated Vacancy

While suburban office performs better than downtown, assets with vacancy above twenty percent or significant sublease exposure should be avoided. The two point two million square feet of sublease inventory concentrated in University Town Center and Sorrento Mesa will pressure direct rents and limit landlord pricing power.

Class B and Class C suburban office face existential challenges as tenants flight-to-quality into newer Class A space with superior amenities. Assets built before two thousand without recent capital investment will struggle to compete and face obsolescence risk.

What the Data Suggests: Market Implications and Strategic Positioning

Comprehensive analysis of San Diego County’s commercial real estate market in twenty twenty-six reveals a bifurcated landscape requiring surgical capital allocation.

The sixteen percent projected increase in national commercial real estate investment activity to five hundred sixty-two billion dollars reflects improving market sentiment and stabilizing pricing.

However, sectoral and geographic performance will vary dramatically.

Industrial properties in South County, particularly Otay Mesa, offer the most compelling risk-adjusted returns. Institutional capital deployment by Hines, Kearny Real Estate, and Crow Holdings validates the long-term investment thesis.

The submarket benefits from structural advantages including port proximity, binational workforce access, and severe land constraints in competing areas that will drive future absorption.

Current vacancy of nine point six percent and pricing at three hundred seven dollars per square foot represent a compelling entry point relative to replacement cost and long-term fundamentals. CBRE’s upgraded forecast of more than one billion square feet of national industrial leasing in twenty twenty-six, the strongest year on record, supports conviction in the sector.

Multifamily investments require careful submarket selection and realistic underwriting. San Diego’s demographic advantages including a large twenty-to-thirty-four-year-old population facing homeownership barriers create sustained rental demand.

However, thirteen thousand units delivered over three years and vacancy at five point four percent, the highest since two thousand nine, demand conservative rent growth assumptions.

The twenty-three percent decline in per-unit values in fourth quarter twenty twenty-five creates acquisition opportunities for patient capital willing to underwrite flat to modest rent growth over a three-to-five-year hold period.

Properties in North County Coastal and established urban submarkets near major universities and employment centers offer superior risk-adjusted returns.

Retail requires extreme selectivity. Deeply negative net absorption of negative two hundred fifty-one thousand five hundred twelve square feet and availability at a five-year high signal fundamental challenges. However, experiential retail in irreplaceable locations like The Headquarters demonstrates that properly positioned assets command premium valuations.

Investors should avoid downtown San Diego office and life science assets entirely.

Downtown office vacancy of thirty-five point eight percent represents the highest among major United States central business districts with no credible near-term recovery path.

The Irvine Company’s sale of six office towers since late twenty twenty-four, including One America Plaza at a sixty percent discount to two thousand six pricing, demonstrates institutional capitulation.

Life science vacancy of twenty-six point six percent with one point five million square feet of sublease space and ongoing development pipeline creates a multi-year absorption challenge.

Negative net absorption of one hundred forty-one thousand four hundred forty-three square feet and rents down five point two percent year-over-year signal deteriorating fundamentals that will persist through at least twenty twenty-seven.

CBRE’s forecast that cap rates for most property types will compress by five to fifteen basis points in twenty twenty-six reflects improving market sentiment. However, this compression will accrue primarily to industrial and multifamily assets with stable fundamentals rather than distressed office and life science properties.

Total returns will be income-driven in twenty twenty-six with asset selection and management as key drivers for performance.

Investors who maintain discipline, avoid challenged sectors, and focus capital on industrial and select multifamily opportunities will generate attractive risk-adjusted returns while preserving capital through a complex market environment.

The San Diego commercial real estate market in twenty twenty-six rewards investors who recognize that making money requires equal parts identifying opportunities and avoiding disasters.

Industrial properties in South County and value-add multifamily in strong demographic submarkets offer compelling returns.

Downtown office and life science across all submarkets present unacceptable risks that demand complete avoidance regardless of apparent pricing discounts.

References:

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