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Multifamily transaction activity increased 13 percent year over year in San Diego in 2012. Although many people predicted a dramatic increase in year-end closings to avoid the uncertainty of tax reform, owners continued to shelter their money in apartments.
Economic Drivers
San Diego’s diverse economic base added 24,600 jobs over the past 12 months, and year-over-year employment gains were positive in all sectors except manufacturing.
• Unemployment has decreased 1.1 percent since November 2011, and as of November 2012, is 1.3 percent below state levels.
• Home prices increased about 8.6 percent in 2012, but remained 35 percent below the peak levels of 2006, with a median priced home at $397,000, and a mere 50 percent homeownership rate in the metro area compared to 66 percent nationally.
• San Diego’s population has increased 5.81 percent since 2008. Projections call for solid 1.5 percent annual growth through 2017.
Performance
San Diego remains a supply constrained market with a vacancy rate of 5.3 percent countywide, including Class A, B and C product. Coastal and core submarkets routinely log less than 3 percent vacancy. San Diego’s year-over-year rent growth is expected to be 2.2 percent in 2013. It is expected to increase to 3.1 percent, 3.4 percent and 3.5 percent between 2014 and 2016, respectively. Since vacancies did not inflate greatly during the recession, the demand rebound is steady. Rents are resuming their ascent in 2013, slightly ahead of median household income growth.
• Apartment demand remains strong, with net absorption expected to outpace new construction over the next few years. Vacancy is expected to tighten even further through 2016. Mission Valley, Downtown and the I-15 corridor continue to be hotspots for development. Apartment deliveries will be between 1,500 and 2,200 units per year through 2016, a marked increase over the previous years, but less than 1 percent of inventory annually. Net absorption should also outpace new construction during each of those years.
Transaction Velocity
• Sales volume was $1.14 billion by year-end 2012, with 47 properties of $5 million or greater, totaling 8,224 units, changing hands.
• The average price per unit was $141,000 in 2012, a 20 percent decrease year over year. This was largely due to the lack of Class A product trading.
• The prior 12 months’ average cap rate settled around 5.7 percent for all class types. This was below the actual U.S. cap rate for comparable properties, which averaged 6.1 percent. Cap rates range between the low-4 to the mid-5 percentage range for Class A and B product depending on age and location.
Outlook
San Diego’s high barriers to entry, desirable location and diverse job base will amplify its economic recovery and keep the national spotlight, from a population growth and multifamily investor demand perspective, over the next 36 months.
• A population growth of 1.5 percent is expected through 2017, with Echo Boomers set to represent 23 percent of the population.
• Job growth is expected to outpace most California metros over the next three years, averaging 2 percent annually, which would reduce unemployment to 6.5 percent by 2017.
— Darcy Miramontes, executive vice president, Jones Lang LaSalle