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Apartment construction surge in SD may boost vacancies

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A burgeoning apartment construction cycle will take hold in San Diego this year, putting modest upward pressure on vacancy, according to a Marcus & Millichap report.

A total of about 3,800 apartment units are projected to come online in the county in 2013, outpacing last year’s addition of 1,090 units, causing vacancy projections to climb about 30 basis points to 3.1 percent this year, by M&M’s accounts.

Different surveys reach different conclusions as to the apartment vacancy level here.

Kearny Mesa-based MarketPointe Realty Advisors -- which limits its biannual surveys to properties with 25 or more units -- arrived at about a 4.5 percent vacancy rate in its latest survey in September. MarketPointe’s next survey is in March.

While MarketPointe limits its surveys to larger complexes, it also conducts a larger sampling than M&M.

Helping to fill apartments in this county is the projected addition of 30,800 jobs this year, translating into a 2.4 percent annual growth rate, the report added. About 21,000 jobs were added in 2012.

The largest residential project expected to be completed this year is the 1,800-unit Casa Mira View by Garden Communities in Mira Mesa.

So far, new developments have reportedly been well received by renters, including Sudberry Properties’ planned 306-unit Circa 37 in its big Civita masterplan at the northern edge of Mission Valley.

Circa 37 features floor plans ranging from 674 to 1,384 square feet in studio- to three-bedroom configurations.

Rents are subject to change, but the Circa 37 website places the range from $1,680 to $2,810 per month -- numbers that are starting to resemble mortgage payments.

Stricter capital requirements could keep people in apartments who might otherwise move, however.

M&M, meanwhile, projected landlords will lift average asking rents 4.2 percent countywide to $1,444 per month this year, while effective rents are projected to climb 4.5 percent to $1,410 per month.

Although tenants leased these apartments as the projects came online, an extension on the timeline to fill new units in 2013 is expected, as construction more than triples 2012’s figure.

Nonetheless, M&M said conditions will remain healthy enough for apartment operators to push rents higher at the fastest pace since 2008.

In 2013, other Southern Californian, national, and international investors are expected to make their way to San Diego at approximately the same pace as 2012.

“This year will likely begin with a flurry of activity as 1031 exchange capital targets local assets to avoid higher taxes," the report stated. "As a result, cap rates that are already in the high 5 percent range could be pushed even lower in the coming months.”

The report said as the window to place exchange capital from properties sold in 2012 closes, some pressure on first-year yields will likely be alleviated, and the market will return to a more sustainable transaction pace.

With many investors battling over the same assets, the report noted that smaller properties may be the way to go for many investors who are otherwise unable to compete with large REITs or major capital funds.

For example, coastal properties may be desired the most, but may have too much competition and yield disappointing returns.

“Investors seeking elevated yields will venture away from the coast, where first-year returns can range from 50 to 100 basis points higher than in sought-after coastal submarkets,” M&M added.

The M&M report said San Diego will keep its national sixth place ranking in terms of strength behind such cities as New York, San Jose and San Francisco.

Although the San Diego market isn’t in the top spot. M&M noted it is still stronger than 90 percent of the U.S. markets.

San Diego is faring better than Los Angeles, which ranked 10th place for the 2013 survey; this was an improvement from its 13th place status a year ago.

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