Jack Nooren, NAI San Diego
It is a great time to be a multifamily owner in San Diego. Vacancies are at the low rate of 4.1 percent for the county, while rent growth is at its highest level since 2011. Cap rates and interest rates are still at record lows, and we are slowly seeing an increase in inventory as owners realize values are higher than ever. We will soon see a rise in interest rates, and can expect a reduction in values as the cash-on-cash returns are reduced. For every 100 basis points of increase in rates, we may see up to a 6.7 percent reduction in value.
Rental market performance, according to the San Diego County Apartment Association, has weighted averages in San Diego up to:
$974: Studios
$1,301: one-bedroom
$1,609: two -bedrooms
$1,943: three -bedrooms
South Bay has the highest vacancies at 5.1 percent, while North County has the lowest at 3.1 percent. Chase, one of the largest lenders in San Diego, is expecting rent growth of 35 percent over the next five years. This news is encouraging as the market has been flat in San Diego for years.
There were 139 apartment buildings with 50 units or less that sold in the past quarter. Cap rates, meanwhile, are averaging 5.1 percent. With that in mind, we expect an increase in availability over the next six to 12 months. This availability increase, paired with higher rates, may result in a slight decline in values.
San Diego is currently ranked seventh in the nation for rapid rent growth. This growth is expected to be at 4 percent, while the vacancy rate is expected to be 2.9 percent by year-end, according to a report by Freddie Mac.
Demand will remain strong this year, as the Millennial generation has shown they’re more likely to rent than buy. About 75 percent of current Downtown residents are renters. With the Millennial desire to live a “work hard, play hard” lifestyle, it’s no wonder there is such a large population of thise group in the Downtown area.
Millennials may also be the catalyst for the emergence of new complexes in urban areas that are rich in amenities and cater to smaller household sizes of about 1.55. Restoration construction has become a huge trend, and we’re seeing lots of properties like boutique hotels and historic buildings being transformed into apartments complexes.
The future for multifamily is bright in San Diego. The economy is expected to grow by 3 percent this year and, due to the lack of available land to develop, we will not see the kind of overbuilding that is expected in several other same-size metropolitan markets.
By Jack Nooren, vice president of NAI San Diego. This story originally appeared in the September 2015 issue of Western Real Estate Business magazine.