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S.D. apartment market improves, as rents on the rebound

SAN DIEGO -- Apartment investors, already sitting in the catbird seat, are expected to see their hands strengthened further with limited construction and rents edging back up here.

An apartment economic forecast was the final session in the San Diego County Apartment Association’s Education Conference & Expo at the San Diego Convention Center last week.

While rents dipped a little during the course of the recession, they have returned to near pre-recession levels. The average rent was $1,355 as of the end of March according to MarketPointe Realty Advisors.

“San Diego County’s rental market is improving as rental rates rebound,” said Russell Valone, MarketPointe Realty Advisors president.

The average vacancy was 5.03 percent. A market with a 5 percent rate is considered to be in balance and with few apartments being constructed, this is only expected to tighten.

Valone said there are numerous factors at work that will guarantee rental units will continue to get filled.

One, he said, is that people who were foreclosed out of their homes have to go somewhere.

Times have changed, and not just due to foreclosures.

During the middle of the last decade, luxury units were filling quicker than other units, in many cases with people often doubling up with roommates to pay the rent.

While people continue to double up, older units are now leading the way in terms of occupancy.

While the vacancy rate for a pre-2000 unit, with an average $1,019 rent, was just 2 percent as of the end of March, the vacancy rises to 6 percent for a 2000-2007 unit, and climbs 20 percent for a 2008 or newer unit with an average rent of $1,879.

“And newer townhomes command about $500 more than conventional apartments,” Valone said, adding that it should also be noted that a lot of these units are still in their first-time lease-up.

Rents are climbing slowly, but Valone cautioned that particularly in a fragile economy “you can’t raise your rents every year.”

Valone noted the for-sale market still remains so unsettled that people are reluctant to take the plunge to buy a home because among other things, they wonder if prices might still go lower.

The other issue is despite significantly lower home prices, it is still cheaper to rent than own in most instances, and qualifying for a home may be problematic.

“In Southern California where it’s more than $600,000 for a detached home, even $65,000 doesn’t get you very far,” Valone said. “and about $100,000 of that is fees.”

Another event happening is the adult child who "boomerangs" back to the parents after college.

While at first glance, that may not be seem to affect the rental market, Valone said in most cases the grown child wants to get out of the house as soon as possible and the parents want the same thing.

That may be at cross purposes in a market with high demand and a limited number of affordable apartments, however.
”Echo boomers (children of the baby boomers generation) are the next pig in the python,” Valone said.

Valone, who predicts stagnant home prices for the next two years, added that even when these echo boomers have the wherewithal to purchase a home, they aren’t going to be nearly as enamored with the idea as their parents.

“They’re not going to sit on a freeway while they drive to Temecula," Valone said. "They don’t even want to buy. It doesn’t make sense to them. They’ve seen families lose their homes, they’ve watched values drop by 40 percent … and with a higher degree of port graduate work, they tend to stay in apartments longer as well.”

Meanwhile, at a time when there is expected to be more demand for rental housing, very little multifamily housing of any kind is getting built here on an annual basis.

“Since 2005, San Diego County has added twice as many renter occupied households as it has multifamily units,” Valone said, noting that while there were 61,157 renter-occupied households added in San Diego County, only 30,127 units were added during that same period.

Although permits were pulled for 1,499 multifamily units in the first four months of 2011 here -- the strongest such period since 2007 -- a couple of large projects can skew these numbers.

What’s more, at least a handful of these units are condominiums and affordable apartments.

The multifamily construction activity remains at a fraction of what it was during the middle of the last decade -- meaning rents have nowhere to go but up.

Put simply, construction isn’t close to meeting demand, setting the stage for lower vacancies and higher rents.

This same dynamic has been mirrored in the new, for-sale housing arena -- meaning more people may stay in rental housing for longer periods, Valone noted.

Another factor impacting the rental market is jobs. If junior can’t find one, he will stay at home longer. Valone, who is dealing with this issue himself, is encouraged on this score.

He said California added 409,000 jobs, and San Diego County has added 34,000, since January 2010.

Admittedly sluggish, Valone said it is better than the alternative.

“Are we out of this?” Valone asked aloud. “No, but at least the trend is positive.”

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