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Return of the conversion

Expected national apartment rent hikes in 2007 not likely in San Diego County

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Although apartment rents nationally have been forecasted to increase 5 percent this year -- the equivalent of a 14 percent increase in rent since the end of 2004 -- San Diego County is one of the few regions in the country where this is unlikely to occur.

According to a recent Marcus & Millichap report, asking rents in the county this year are expected to increase 4.4 percent to $1,305 per month. In 2006, asking rents increased 5 percent in the county.

This year, effective rents will grow at a slightly faster rate of 4.7 percent to $1,274 per month. Last year, effective rents increased 5.2 percent.

According to Bob Pinnegar, executive director of the San Diego County Apartment Association (SDCAA), the report's forecast is in line with the feedback he's been receiving regarding rent increases.

Rising apartment demand, resulting in part to housing affordability challenges, will continue to support the San Diego apartment market this year, allowing owners to increase rents and maintain low vacancy, the report stated.

In December 2006, the median resale price of a home in the county was $585,970, a 1.4 percent gain over November, but a 2.9 percent drop from December 2005, according to the California Association of Realtors (CAR).

While falling housing affordability will fuel demand, slower job growth and the return of some condo conversion units to rentals will result in slight vacancy gains in 2007.

San Diego payrolls are expected to increase by 14,400 positions this year, a 1.1 percent increase, after 18,000 new jobs were added in 2006, according to the report.

Vacancy is expected to inch up 10 basis points to 3.5 percent in 2007, after dropping 20 basis points in 2006. Vacancy has ranged between 3 percent and 4 percent for the past five years.

There is concern the return of some condo conversions units could result in a temporary oversupply of rentals, although this trend has yet to emerge, the report said.

Pinnegar disagreed, saying he's already seen conversion units turned back to rentals. He sees this trend continuing in 2007, which will equate to a favorable market to renters, resulting in renters having the opportunity to pick and choose what unit they rent.

According to the report, properties in the coastal submarkets, including the North County beaches, as well as La Jolla, will continue to command top investment dollar. Buyers will also target assets with upside income potential in the Spring Valley/Lemon Grove and Chula Vista submarkets.

"Investors are really looking to buy into this market," Pinnegar stated, adding currently investors are looking for bulk sales, where a bank sells a package of apartment units that have already been converted.

While the appeal of living downtown will be attractive to high-income renters, opportunities abound in the more affordable submarkets to the east and south, including Spring Valley/Lemon Grove and Chula Vista, where owners have been relatively slow to respond to increased renter demand, the report said.

Overall healthy fundamentals are forecast to support apartment values and heightened levels of activity in 2007.

"The condo conversion craze pushed the median price and sales velocity skyward in recent years, but both have recently settled to normalized levels," the report stated. "Going forward, we believe the gap between buyers' and sellers' expectations will narrow, even as investors continue to target properties with strong operational rather than conversion prospects.

Regarding the production of new apartment units in the county, 1,700 new apartments are expected to come online in the metro area, and nearly 700 apartments are scheduled for completion downtown.

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