San Diego’s Multifamily Market Outpaces Its 2018 Performance
San Diego continues to exhibit very strong fundamentals with a healthy and diversified economy, as well as a continued shortage of housing supply. The unemployment rate of 3.3 percent is below both the California and national unemployment rate. Tourism, biotech, healthcare, education, military/defense, drone manufacturing, business services, software and other high-tech industries have made San Diego a magnet for venture capital and other business investment, creating the jobs of the future. Amazon, Apple and several other high-profile technology companies have also announced expansions in San Diego. The region attracted $744 million in venture capital this past year alone. Local housing policies, which have been unfriendly to new development, have made it very expensive to build, thereby perpetuating the shortage of housing. This dynamic has continued to bode well for multifamily investment in the region.
CBRE’s Apartment Market Report for the end of the second quarter illustrates the following year-on-year changes from 2018:
• The vacancy rate moved 9 basis points to 3.6 percent
• Rental rates increased by 2.9 percent
• New construction deliveries dropped by 14 percent
• Sales volume included 95 transactions with a total dollar volume of $476 million (compared to 32 sales transactions last year that represented $290 million)
The following quarter-over-quarter changes were observed compared to the first quarter of 2019:
• The vacancy rate dropped from 3.9 percent to 3.6 percent
• Rental rates increased by 1 percent
• The number of sales transactions increased by 23 percent
• Dollar volume increased by 39 percent.
Regarding pricing in the second quarter, the average price per unit was $238,000 and the average cap rate was 4.45 percent. This was compared to second-quarter 2018 averages of $261,569 per unit and a cap rate of 4.2 percent — along with quarter-one 2019 averages of $278,909 per unit and a cap rate of 4.29 percent. The difference in pricing would indicate a perception that a larger amount of smaller and older buildings were sold in the second quarter of 2019, which is supported by only four sales of 50 units or more.
On the legislative front, there are a few bills making their way through the legislature. This includes AB 1482, which proposes annual rent increases to be capped at 7 percent, plus inflation, as well as AB 1481 and AB 1697 Just Cause Termination, which would prohibit landlords from terminating tenancy without first listing a specific reason for doing so and, in some situations, requiring landlords to pay for relocation assistance.
While development activity has been mostly focused in Downtown San Diego and East Village, there is heightened interest from the development community due to Opportunity Zone designations in several areas of the county. These regions have been given increased density allowances and decreased parking requirements because they are in transit-oriented areas and will provide a certain ratio of affordable and “micro” units. In addition, several communities within San Diego County, such as Mission Valley and Kearny Mesa, have proposed community plan revisions, which would provide for increased housing and density. These actions could potentially add to the much-needed supply of apartments.
— By Allen Chitayat, first vice president. CBRE. This article first appeared in the September 2019 issue of Western Real Estate Business magazine.