San Diego County's average apartment rents could nearly double between the benchmark years of 2010 and 2020 based on a 40-year history of such trends, according to an apartment broker and former San Diego councilman.
Fred Schnaubelt asked, “How can rents double? The same way they have gone up 11 fold since 1970.”
Citing data from The CoStar Group, (Nasdaq: CSGP) Schnaubelt said the average rent per month climbed from $126 per month in 1970, to $283 in 1980, and to $620 in 1990.
While the figure only had only climbed to $747 in 2000, it had reached $1,324 in 2010 despite an intervening recession.
Schnaubelt said while CoStar projects the average rent will rise incrementally from $1,354 in 2014 to $1,390 this year, with community opposition and high barriers to entry, the average rent should easily exceed $2,000 by 2020.
A March 2015 survey by MarketPointe Realty Advisors places the average significantly closer to that $2,000 mark.
That report -- which is limited to properties with 25 or more units -- said the average monthly rent was $1,575 in March, compared to $1,448 in the like month a year earlier.
“If you look at apartments built since 2010, the average is already $2,167,” said Russell Valone, MarketPointe president, who also can easily see how average rents may exceed $2,000 in five years or less.
Valone -- who noted that virtually all new market rate apartments are of the luxury variety -- said that properties with 25 or more units are often those with the most amenities, and are often significantly more expensive rentals than smaller complexes.
As rents have climbed, so have the prices per unit for investors.
Apartments, which have long been a favored asset class for investors, were priced at $11,428 per unit in 1970, according to CoStar.
The per-unit sale price of $30,714 by 1980 reached $58,000 ten years later; was $122,135 in 2000 and $139,025 ten years after that (during a recession); rose to $176,531 in 2014, and is expected to be $196,996 this year.
Schnaubelt said if the past is prologue, the average per-unit cost could be around $280,000 by 2020.
“You can expect the average price to exceed $278,000 per unit by 2020, and more than $400,000 in the coastal zone, based on the last 44 years,” Schnaubelt said.
Schnaubelt said there are numerous reasons for the higher rents and per-unit prices.
“Notice the trend in prices as government and NIMBYs [not in my backyard] make new construction ever more expensive,” Schnaubelt said.
Schnaubelt said as new requirements/costs are capitalized into the price of all existing properties, solar energy and stormwater runoff mandates are also making rentals more expensive for tenants and investors.
Valone said he expects it will also become harder to develop apartments, as that will be competing with condominium developers for the same land.
If true, that could push up acquisition costs and make apartments that much expensive to buy and renters to rent.
The other factor affecting rents is that even with thousands of units under construction, there is little vacancy.
The San Diego County Apartment Association reported a 2.3 percent vacancy factor as of the end of 2014. MarketPointe put the figure at 2.51 percent in March.
The apartment industry cites 5 percent vacancy as a balanced market.
Residential developers have long warned that fees and long processing times have made housing less affordable, driving companies away. Valone seemed less concerned about $2,000 rents doing the same thing.
“I don’t think there is much impact on the kinds of companies that we want to foster,” Valone added.
A new Zillow Group Inc. (Nasdaq: Z) report says that in San Diego County and the United States saw single-family rental rate increases that in April outpaced the rate of home price increases for the first time in years.
The nation’s average single-family rent rose 4 percent year-over-year to $1,364, according to Zillow. San Diego’s average single-family rent amounted to $2,330 in April, a 5.1 percent increase year-over-year.
“Tremendous incentives exist to get into home ownership these days. Mortgage access is improving, interest rates are low, and home values remain below prior peaks,” said Stan Humphries, Zillow chief economist. “But it will be increasingly difficult for many renters to realize these benefits as this country’s rental affordability crisis continues to worsen.”