Multifamily Rents Skyrocket in San Diego Despite Pandemic
By Allen Chitayat, First Vice President, CBRE Capital Markets
The San Diego multifamily market has continued to exhibit very strong fundamentals in light of the pandemic. This is due to the region’s diversified economy, as well as the continued shortage of housing supply. Tourism, biotech, healthcare, education, the Navy, drone manufacturing, business services, software, and other high-tech industries have made San Diego a magnet for venture capital and other business investment, with several high-profile technology companies announcing expansions in San Diego.
Local historic housing policies, which have been unfriendly to new development, have made it very expensive to build, and perpetuate the shortage of housing. This dynamic has continued to bode well for multifamily
investment in the region. However, there have been numerous efforts by the various municipalities within San Diego County to increase housing density in their transit priority areas. This has been aided by more relaxed parking requirements and revisions of community plans in the City of San Diego (through the Complete Communities Initiative), Mission Valley, Kearny Mesa and Downtown’s Midway District.
These community plan amendments and initiatives call for an additional supply of about 70,000 new housing units. In addition, the Navy recently announced a preliminary decision to redevelop the 70-acre NAVWAR site that sits between Downtown and Old Town, which could add as many as 10,000 housing units. Furthermore, accessory dwelling units (ADUs) or “granny flats” are now allowed in many San Diego communities.
The San Diego apartment market recorded its lowest vacancy rate in more than 20 years in 2021. It now stands at 2.9 percent. Annualized rent growth is also quite robust, exceeding 10 percent. Similar to most urban markets across the country, Downtown San Diego’s multifamily market was negatively impacted during the pandemic. However, we have seen rising demand as absorption has increased dramatically, with more than 9,500 units absorbed throughout the county.
The multifamily investment sales market has been very active during the past 12 months, setting record prices and volume. There were 425 sales recorded totaling about $3.3 billion with an average price per unit of more than $350,000. There was a cross section of buyers in the market with some new entrants from out of the area, some who have not been active for over 10 years, and those who have been consistently active in San Diego and other markets throughout the country.
There were more than 4,500 new units delivered in San Diego County in the past 12 months. Another 6,700 units spread over 39 properties are currently in the pipeline. This will add about 2.5 percent to the existing inventory. Most of the new development is concentrated in Downtown and Mission Valley, however, other submarkets such as Bankers Hill, Mira Mesa, Scripps Ranch, Kearny Mesa, Chula Vista and North County represent a third of the supply being delivered.
Some of the more notable projects are Holland Partners’ 840-unit Society Bradbury in Mission Valley that delivered in the second quarter of 2021 at an estimated cost of $600,000 per unit; Pinnacle International’s 618-unit 618 Broadway Tower in the East Village submarket, which will deliver in October 2021; Sunroad Holding’s 442-unit Vive Lux in the Spectrum area of Kearny Mesa, which will deliver this September; and Mill Creek Residential Trust’s 368-unit Modera San Diego in the East Village submarket, which will deliver in November.
One particularly interesting project is the 89-unit Secoya by Murfey Development that is currently under construction in Bankers Hill. Secoya is one of the first projects to make use of San Diego’s Complete Communities initiative that was approved in November 2020. Under normal zoning laws this 10,000-square-foot parcel would allow for 25 units. However, by using the Complete Communities program, a developer can sidestep the number of units per acre limitation and apply a floor-area ratio formula to the site. This, coupled with the relaxed parking requirements and the inclusion of affordable housing units, can provide substantial increased densities to each qualifying site.
Given the sales activity, rent growth and strong demand, conditions are ripe for significant additional new development. However, several factors serve as challenges to overcome, such as skyrocketing construction costs, the rising cost of available land and community opposition to multifamily projects. Furthermore, San Diego County’s slow-moving project entitlement process — not to mention the cost of obtaining permits (almost $40,000 per unit depending on the municipality) — add uncertainty, delays and significant cost increases for new developments.
The housing shortages will continue into the foreseeable future as the above factors come into play as developers seek the feasibility of each project. Given San Diego’s projected economic growth, the housing shortage will continue to push rents and, therefore, the values of existing properties and newly constructed units. San Diego will remain one of the nation’s most desirable multifamily investment acquisition targets due to these continued favorable dynamics.