In 1867 Alonzo Horton, owner of a furniture store in San Francisco, sold his store and moved to San Diego with the idea of building a vibrant New Town along the San Diego Bay, south of the old town. Chinese businesses fled there to escape anti-Chinese violence, however they were soon segregated into the local Chinatown, located in the red-light district, the so-called "Stingaree", amid brothels and saloons.

In 1881 Frank Kimball, a San Francisco carpenter who in 1868 had relocated to southern California due to health reasons and had become wealthy by growing olives and fruit in his vast ranch, in fact possibly the wealthiest man in San Diego County, formed the California Southern Railroad that started building a connection to the Atchison, Topeka and Santa Fe Railway, i.e. the transcontinental railroad to Chicago. That started the boom of San Diego. The railroad was completed in November 1885. San Diego's booming real estate attracted all sorts of investors. For example, Wyatt Earp, famous for the legendary gunfight at the O.K. Corral in Arizona, purchased several saloons starting in 1887.

Both Horton and Kimball actually lost money in the boom of San Diego, but new wealth was created. In 1892 San Francisco shipping magnate John Spreckels, the son of sugar magnate Claus Spreckels, who had started investing in 1877, opened the San Diego Electric Railway and took over the San Diego street railway system which had been mostly relied on horse-drawn streetcars. He finally relocated in 1906 to a mansion designed by Harrison Albright and located across from Hotel del Coronado. After the 1906 earthquake and after his father's death in 1908, John Spreckels went on a buying spree in San Diego. Spreckels also started in 1906 the San Diego and Arizona Railway to provide a shorter route to Chicago, completed in 1919.

In 1899 San Diego opened the San Diego Normal School, which later became San Diego State University. It was designed by local architects William Hebbard and Irving Gill, the latter of whom had trained in Chicago, which may explain why the main Beaux-Arts style building resembled the Fine Arts Palace of the World’s Columbian Exposition in Chicago of 1893.

San Diego further benefited from the Spanish–American War of 1898 and the opening of the Panama Canal in 1914. Much of its growth was also due to philanthropists. George Marston, owner of the largest department store in the city, purchased the old Presidio of San Diego in 1907 and hired architect John Nolen to turn it into a park. Marston also hired Nolen in 1908 to design the Central Park of San Diego: Balboa Park, where his own mansion had been designed by Irving Gill and William Hebbard in 1905.

Until the 1880s, nobody lived permanently in La Jolla, a beach north of San Diego. Then in 1894 a railroad connected it to San Diego and it became a popular weekend destination. That year a German immigrant, Anna Held built a cottage that she called "The Green Dragon", designed by Irving Gill, and realized that she could rent it to artists. That was the beginning of the (modest) Green Dragon Colony and of a seaside community. La Jolla was not much of a town before in 1896 Ellen Browning Scripps moved in. The sister of Detroit newspaper magnate Edward Scripps, she commissioned Irving Gill several buildings, such as the La Jolla Woman's Club (1914) and her own house (1916, now the Museum of Contemporary Art), and founded a women's college in 1926. She spent much of her forture funding hospitals, thereby jumpstarting a future industry (notably the Scripps Metabolic Clinic in 1924 which which evolve into the Scripps Research Institute).

To celebrate its status as a major city, San Diego hosted the Panama-California Exposition in 1915–16 in held in Balboa Park.