While Proposition 10 — California’s proposal to strengthen rent control — was defeated last November, it somewhat stifled the multifamily investment sector in San Diego as investors worked to figure out the next wave of opportunity. But now that market is starting to bounce back.
Total multifamily sales volume in 2018 was just under $2 billion. However, several signs pointed to a resilient San Diego market, including cap rates holding steady at 4.6 percent and an increase in pricing.
The tides have begun to turn in the past few months, with numerous apartment deals on the market — more than we’ve seen at one time in the past few years. This is especially true in Downtown San Diego where a significant number of new merchant-built deals are expected to come to market, continuing throughout the year. These are luxury complexes, with some expected to fetch as much as $600,000 per unit.
Kyle Pinkalla, NorthMarq
Six conventional multifamily sales (with at least 100 units) closed in the first half of this year, totaling $550 million. This is an increase over the four sales totaling $372.5 million in the first half of 2018.
The median price per unit through mid-year was $258,200, although roughly one-quarter of those deals were in the $350,000- to $400,000-per-unit range.
Two large transactions are helping set the tone: The Regents at La Jolla in University City (UTC) sold for $141.5 million, or $427,492 per unit, and The Millennium Mission Valley traded for $140 million, or $460,526 per unit. Apartments in San Diego are in high demand by Empty Nesters and Millennials looking for surf and sun in a live-work-play environment. San Diego has one of the highest percentages of Millennials in the nation as they seek strong employment and wage growth. The region also ranked eighth in population growth among major U.S. cities, according to the U.S. Census Bureau.
San Diego’s apartment rents rose 4.6 percent and vacancy tightened to 3.9 percent, despite delivering 1,000 new units. Another 4,700 units are in the pipeline, many of which are scheduled to open by year-end.
The capital markets are also helping to drive transactions. The 10-Year Treasury yield has fallen dramatically, meaning financing costs for apartments are considerably lower than a year ago. Although pricing has increased, investors are aggressively looking to purchase as the debt they can obtain on new acquisitions is significantly cheaper.
San Diego is a hotbed for biotech, life sciences, technology and engineering companies. Apple is opening a new office in UTC. Amazon is opening a facility in Chula Vista, having built a tech hub in UTC. Manchester Pacific Gateway is underway Downtown and will serve as the Navy’s regional headquarters. The city is working to bring more jobs and a live-work-play environment Downtown.
The city has a chronic housing deficit as job growth outpaces housing starts. The San Diego region will need nearly 73,000 new apartment units by 2030 to keep up with demand, according to a study by the National Multifamily Housing Council and National Apartment Association.
Competitive Market, Lack of For-Sale Supply
San Diego is a highly competitive investment sales market and tends to lean toward private, local investors, many of which have long-term holds. That being said, institutional investors that are heavily seeking new-core supply and 1031 buyers are both looking to break into the market.
Southern California generally attracts international buyers as they look for safe havens for the longer term. Cap rates have compressed significantly in some other markets, making investors recognize that they can be in a higher barrier-to-entry market like San Diego for the same cap rate.
Meanwhile, there’s more capital chasing deals than available properties for sale. While value-add deals dominated activity in 2018, 2019 and 2020 will likely see more core activity because the new merchant-built product is getting completed, stabilized and starting to hit the market. We believe there will be an increase in transaction volume this year. It has already started, as we haven’t seen this many properties on the market in several years.
— By Kyle Pinkalla, managing director of investment sales, NorthMarq. This article originally appeared in the September 2019 issue of Western Real Estate Business magazine.