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SD may have apartment shortfall despite construction increase

While the pace of apartment construction has definitely picked up in San Diego County, the pipeline for new units may fall far short of demand in most locations.

A second quarter Marcus & Millichap report said with 32,400 new jobs projected to be added to the San Diego County rolls this year, the demand for apartments will be exceptionally strong.

After 1,400 units were completed last year, developers are projected to bring 4,500 rentals online in the county this year.

Approximately 6,000 units are underway in the county, including 5,200 market-rate apartments. Beyond that, only 4,000 units are currently on the drawing board. During the second quarter of last year, 5,700 units were planned for construction.

"A handful of submarkets are particularly vulnerable to the impact of new supply, which could result in localized widening of concessions by year end," the report states.

"Along the Interstate 15 corridor, from Interstate 8 to Rancho Bernardo, thousands of units are under construction."

More than 2,000 of these apartments under construction are in a single project; Garden Communities' Casa Mira View development at Mira Mesa Boulevard and Interstate 15 in Mira Mesa.

"Although the pipeline of projects is not overwhelming, questions surrounding the amount of demand for high-priced apartments remain firmly in place," the report said.

The report said aside from the I-15 corridor, the supply-demand balance remains highly favorable for owners.

"The neighborhoods surrounding Downtown (San Diego) and along the coast are reporting very tight conditions, which will support healthy rent growth through the end of the year," the M&M report said.

The report added that the gap between being able to rent and being able to own will only continue to widen.

"Home-value appreciation has priced most renters out of the housing market," M&M emphasized. "Additionally, underwriting standards remain a hurdle for potential homebuyers, keeping the rental pool population stable."

The average rent is projected to end the year at $1,512 per month, up about 3.5 percent year-over-year.

MarketPointe Realty Advisors, a residential real estate data firm, placed the average at $1,445 in March. The San Diego County Apartment Association's (SDCAA) figure was a bit lower at $1,260 per month.

As vacancy is pressured by the presence of new construction, the pace of rent growth is projected to moderate this year.

"Rent growth was strong across all of the age tranches during the past year. Gains were largest at 1990s-vintage properties, where effective rents climbed 6.1 percent to $1,736 per month. Assets developed in the 1970s posted an increase of 3.9 percent, the lowest in the market," the Marcus & Millichap report stated.

During the past 12 months, the median single-family home price climbed 17 percent to $489,000.

"Although median household income growth during the same period was above average at nearly 4 percent, the shortfall between minimum qualifying income and median household income is more than $50,000 annually," the report continued.

The countywide average vacancy is expected to edge up by 40 basis points to end 2014 at about 4 percent. A 5 percent vacancy is considered by the industry to be a balanced market.

Nationwide apartment vacancy was flat in the first quarter at 5 percent as demand growth virtually offset the completion of more than 45,000 apartments, according to Marcus & Millichap.

Comple­tions are on track to reach 215,000 rentals in 2014, the highest yearly total in several years.

For the entire year, U.S. vacancy will rise 20 basis points to 5.2 percent, while the average rent will advance 2.6 percent.

A SDCAA report pegged the countywide average at a much lower 2.8 percent.

There can be a lot of reasons for the disparities in the surveys that range from the timing of the survey to the parameters of the sample.

MarketPointe, which limits its samples to complexes with 25 or more units, checked in with a 4.74 percent vacancy rate when it measured the market last March.

The average vacancy at the time of the survey during the second quarter ranged from 2.1 percent in the Mid-City and National City areas to an even 4 percent in the University City/La Jolla and the North Inland portions of San Diego County.

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