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SD continues to absorb apartments while high rents loom

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San Diego County's apartment market continues to be strong, and there seems to be little fear about too much construction.

Marcus & Millichap reported during the fourth quarter that limited housing affordability due to higher down payment requirements and other factors, will continue to keep people in multifamily housing.

This is despite several thousand new apartments currently in the pipeline that will be phased in over time.

"Deteriorating single-family housing affordability and limited supply-side pressure will support improving apartment operations in the San Diego metro," Marcus & Millichap stated. "Home prices have skyrocketed by more than 30 percent since the end of 2011, pricing many residents out of the most sought-after areas."

The M&M report added young professionals or those looking to live near the coast in North County will continue to find apartments the more affordable option -- though they may have to double up to get them.

"Further south, the neighborhoods that encircle downtown San Diego remain some of the most attractive in the state," M&M continued. "University Heights, North Park and South Park draw an eclectic blend of young professionals and artists that would need to stretch to acquire a single-family home in the area. The result is tight vacancy across the metro, with only two submarkets -- Vista/San Marcos and Northeast San Diego — registering an average rate above 4 percent in the third quarter."

As a result -- even with a significant amount of construction – rents are expected to continue to go up here, both surveys conclude.

Looking ahead, with most of the market rate apartments being constructed today of the luxury variety, average rental rates may continue to be pushed higher here.

The M&M report stated the apartment investment market in San Diego will benefit sellers well into 2014, as interest rates remain favorable and available inventory is below average levels.

An MPF Research/RealPage report has yet to have year-end numbers, but stated the county absorbed 629 apartment units in the third quarter and 2,258 units through September of last year.

New supply levels came down a slightly in the county from the decade high seen in the second quarter, with 224 units delivering in 3rd quarter and 2,193 units coming online in the first nine months of last year.

The diminished deliveries resulted in occupancies up 0.2 points in the third quarter and 0.1 point annually to land at 96.8 percent or a vacancy of just 3.2 percent by MPF's accounts.

While autumn reports by both the San Diego County Apartment Association and MarketPointe Realty Advisors were closer to 4.1 and 4.5 percent vacancy respectively, those surveys were completed at different times and have different methodologies.

MPF reported that vacancy rates remained exceptionally strong in older, more affordable units, but that newer product wasn’t too far behind.

MPF said average apartment rents in San Diego County climbed by about 3.5 percent year-over-year, but didn't report the actual figures.

Average rents generally average between about $1,300 and $1,500 in San Diego County depending on the survey. In any case, the rents continue to climb by any measure.

"Time will tell if the metro can maintain that [3.5 percent growth] premium, with the biggest test likely to come from affordability challenges within the renter base," MPF added. "San Diego is a market often held back on the pricing side by affordability challenges, making it difficult for apartments, particularly those at the top end, to maintain sizable rent growth even when vacancies are few."

MPF said the United States had an average rent growth level of 2.8 percent, as determined by a survey of more than 7 million apartments across the country.

"Late 2013 performance results were encouraging, viewed in light of the fact that completions ramped up during the time period that there’s a seasonal lull in demand,” MPF Research vice president Greg Willett in a statement. “This definitely was a point of vulnerability for the apartment sector, because of the timing of new supply reaching the finish line, and we got past this period without significant damage.”

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