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Rental market here to remain tight despite new construction

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Even with increasing rents and new construction, San Diego County apartment vacancies will remain tight, according to reports by commercial real estate brokers Cassidy Turley and Marcus & Millichap.

Cassidy Turley reported while San Diego County's apartment rents have continued to climb to record levels, nine other metropolitan regions in the country have higher rents than here.

CT reported San Diego County's mid-year $1,452 average rent was not the highest in California at the end of June.

HIgher rent than San Diego could be paid in Los Angeles at $1,499, in Oakland /East Bay at $1,505 and in Orange County at $1,639.

In San Francisco, the average monthly rent was $2,171 as of June 30.

The most expensive rent in the country was in New York City with a $3,187 average at mid-year.

While virtually all the country's markets have seen rental rate increases during the past three years, most of the jumps have been incremental.

In San Diego's case, the average rent climbed from $1,396 in 2012, to $1,443 in 2013, to this year's $1,452.

Both CT and M&M predicted San Diego's average rent will be around $1,500-per-month at year-end.

Along with having the most expensive rents, New York City had the most rapid increase in those rates during the past three years, according to CT.

That metropolitan area saw its rate climb from $3,040 in 2012 to $3,176 in 2013, and this year's $3,187.

San Diego's rents like others across the country may be continuing to climb, but this region had the second-lowest apartment vacancy rate in the country with a 2.6 percent level at mid-year.

The rate here has been fluctuating in a narrow range during the past two years. It had been 2.7 percent in 2012 and 2.8 percent in 2013, according to CT.

By M&M's accounts, new construction will lead to a 40-basis-point increase in the vacancy rate to end the year at 4 percent. A 5- percent level is considered optimal for a balanced market.

CT pegged San Jose with a 2.5 percent vacancy in June 2014 -- the country's lowest level at mid-year..

Memphis, Tenn., was at the bottom of the list in 31st position with an 8.5 percent vacancy mark in June 2014.

M&M reported 1,400 units were completed in San Diego County last year and developers will bring 4,500 rentals online in 2014.

While most new units are quickly snatched up by renters, M&M keeps an eye out for possible overbuilding.

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

Along the Interstate 15 corridor, and from Interstate 8 to Rancho Bernardo, thousands of units are under construction," M&M wrote. "The other major area of concern is downtown San Diego. Although the pipeline of projects is not overwhelming, questions surrounding the amount of demand for high-priced apartments remain firmly in place."

"Aside from these areas, the supply-demand balance remains favorable for owners," M&M added. "The neighborhoods surrounding downtown and along the coast are reporting very tight conditions, which will support healthy rent growth through the end of the year."

M&M said investors with an eye on redevelopment may find opportunities in the popular neighborhoods of North Park, South Park, University Heights and Hillcrest.

Despite high demand in most areas, increasing rents and low vacancies have kept most large apartment complexes off the market. CT didn't identify any large apartment complex sales in the second quarter.

The largest one in the past year was the $161.58 million, November 2013 sale of the 549-unit Coronado Bay Club Apartments in Coronado to a unit of Prudential Investment Management. That sale translated to $294,32-per-unit.

More recently, in February a Jackson Square Properties entity paid $51.95 million for the 300-unit Lakeview Village Apartments in Spring Valley. That translated to $173,167-per-unit.

In January, the ROC Fund paid $48.7 million or $184,470 per unit to acquire the 264-unit Presidio at Rancho del Oro in Oceanside.

With so few large luxury properties making it to the market, the average per-unit price actually went down from $179,000 at mid-year 2013 to $152,000 at mid-year 2014.

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