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SD apartment market driven by jobs, demographics and new construction

San Diego’s apartment market is improving as a result of job growth, demographic trends and limited new construction, according to a senior vice president at John Burns Real Estate Consulting.

Real estate professionals discussed market trends and gave examples of their projects at the 2014 Apartment Perspective, an event presented Thursday by the San Diego County Apartment Association and CCIM at the DoubleTree Hotel in Mission Valley.

Pete Reeb, senior vice president at John Burns Real Estate Consulting, discussed how those three factors are contributing to improving real estate market conditions.

Job growth is creating demand for new housing units and is accelerating the ability for 25- to 34-year-olds to move out of their parents’ homes and get their first apartment, Reeb said. Positive job growth also allows for increasing rental rates, which Reeb said he expects will drive rental rate increases at “significant levels” for the next four years.

Rental rate growth increased 2.7 percent in San Diego over the last 12 months, Reeb said. This ranks about the middle of the market compared with the nation, and is fairly consistent with other Southern California markets.

Limited new construction has allowed for price increases in the rental and for-sale markets, Reeb said.

In the latter part of this century’s first decade, new construction for single-family and multifamily units dipped to its lowest levels in 30 years, he said. In the late 1990s, there were about 300,000 to 500,000 multifamily units being built per year nationwide -- that number dropped to about 100,000 to 200,000 during the downturn.

The market benefited from that lack of supply, which allowed occupancy levels to rise in conjunction with demand from job growth, Reeb said.

Also driving rental rate growth is the number of new renters entering the market. Between 2000 and 2005, there were about 100,000 new renters who entered the market at a time when demand was in the for-sale market.

Between 2005 and 2010, there were 3.8 million new renters who entered the rental market -- some a result of those had lost their homes in foreclosure. Reeb projects that in 2015, 8 million households will enter the rental market.

The number of 25- to 34-year-old renters dropped to 4 million when the market boomed in the late 1990s into the 2000s, and climbed to an all-time high of 6 million when the recession hit, Reeb said.

As the economy started to improve, that number started to come down, and Reeb expects that to continue as more jobs are added to the economy.

Reeb projects that rental rates will grow by more than 4 percent by the end of this year, another 4 percent in 2014, 3.8 percent in 2015 and 4 percent in 2016.

Low interest rates and home prices are counterbalancing that trend by increasing affordability, Reeb said. When the market was booming, 20 percent of renters were moving out to buy a house, and that number peaked at 25 percent. That number dropped when prices increased and the economy declined.

The number has started to increase again in the last couple of years and is up to 15 percent annually, he said.

A rapid rise in home prices in the last 12 to 18 months has made it more expensive to own than rent, but the gap is “still quite narrow,” Reeb said.

In the mid-2000s in San Diego, it was 140 percent more expensive to buy a house than it was to rent.

As prices declined and interest rates went down, last year it was 17 percent more expensive to own than to rent. The gap has widened as prices have increased, and it is about 40 percent more expensive to own than rent.

“The for-sale market is still pretty affordable in San Diego. We see renters moving out to buy a unit before prices go up and before interest rates go up,” Reeb said.

In San Diego, about 27 percent of a typical renter’s income goes toward rent, Reeb said. The median rental rate is about $1,500, with the higher-priced markets closer to the core employment areas and the beach.

“Renters don’t typically like to drive as far to get to work as homebuyers,” Reeb said.

The typical distance to a renter’s place of work is maybe 10 to 15 miles; homebuyers may be willing to drive 50 miles, Reeb said.

Robert Vallera, senior vice president at Voit Real Estate Services, brought up author Nassim Taleb’s book "Antifragile: Things That Gain From Disorder," saying the idea of being “antifragile” is to make money in the up cycle and also if anything goes sideways or off-track. He listed some of Taleb’s advice, including having many small investments; embracing trial and error; being open to ideas; asking questions when there’s contrary information; and seizing good opportunities.

“Have investments and systems set up in a way that you’re not going to run into a problem with cascading failures or contagion from one investment to another,” Vallera said.

Garth Erdossy, senior managing director at Trammell Crow Residential, and Greg Strangman, founder of the LWP Group, showcased a few of their projects and and explained what makes them successful.

Strangman breathes new life into old buildings, he said. In 2007, he purchased the Pearl Hotel with the intent to renovate it into a budget boutique 25-room hotel, which he said is one of his favorite projects.

He said he “celebrates the imperfection,” and that his company doesn’t have to have everything new -- 90 percent of The Pearl is original in character.

Strangman listed a few “aha” moments, including the idea to take amenities used at the hotel and inject them into residential living environments.

“The living experience starts at the front door of the community,” Strangman said.

Some of the units are as small as 350 square feet, creating an emphasis on the common areas. His company commissions street artists to do work on the properties. Some of the properties provide bicycles for the renters, encourage recycling, grow vegetable gardens and do composting.

Strangman seeks to focus on the “psychographic” instead of the demographic. He targets not just the 25- to 34-year-old, but the 25- to 34-year-old who drives an Audi, has an iPhone, enjoys craft beer and is interested in sustainability.

The smaller units attract those in that age group who are looking to move out of their parents’ place, he said.

At Trammell Crow Residential, Erdossy said, the core practice is multifamily development and construction.

The interiors and designs of the buildings are modern with amenities that flow and merge with one another, Erdossy said. The company micromanages the floor plan so that furniture can fit well. The units with flexible space are often popular -- those with an L-shaped kitchen without an island, or bedrooms that are open to the living room.

Erdossy showcased Stella, a 244-unit project in Marina del Rey. He said the company tries to “create personality for each project,” and considers how to make a community where people want to live. Stella doesn’t have beach access, so the firm put a beach on the patio next to the pool with cabanas and fire pits. There’s a meadow to walk dogs and a dog-washing station, which he said is so popular it needs a sign-up list. There’s secure, lockable surfboard, kayak and SUP board storage and a shower to rinse gear and wetsuits.

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