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San Diego apartment market can expect stable vacancies, rents in '10

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While San Diego County's apartment market was hardly unscathed by the recession, a new report says it is poised for at least a modest rebound.

Marcus & Millichap reports while large transaction sales continue to be elusive, landlords and investors may expect stable vacancies, and rents will be generally flat through next year.

The report said in large submarkets where no new units are scheduled for completion this year, including the La Jolla/University City, Mira Mesa/Rancho Bernardo, National City/Chula Vista and North Beaches areas, vacancy levels are each forecast to decline 20 basis points on average over the rest of the year.

Although the countywide apartment vacancy climbed about 30 basis points during the past year to an even 5 percent by M&M's accounts as of the end of the first quarter, this is considered ideal by industry standards.

While construction is expected to bump this figure up to 5.2 percent by the end of this year, M&M notes San Diego continues to have one of the strongest apartment markets in the country.

A March MarketPointe Realty Advisors report pegged the countywide vacancy at a lower 4.75 percent but that firm limits its survey to complexes with 25 or more units.

M&M said the vacancy in Class B apartments is even lower with a 4.4 percent level as of the end of March.

During the recession, people may have doubled up to save on rent or returned home to avoid it altogether, but the M&M report says there are positive glimmers of an economy on the rebound.

Grocer Fresh & Easy Neighborhood Market plans to open three new stores in Oceanside, which could add as many as 100 jobs in the submarket, boosting apartment demand.

The first store will be located on Oceanside Boulevard just west of Interstate 5 and is scheduled to open this summer.

Employers are expected to expand payrolls by 1 percent in 2010 with the addition of 12,500 workers. Last year, 68,900 jobs were cut, a 3.3 percent drop.

Limited construction in most areas should also improve vacancy.

"With additions to inventory marketwide likely to slow considerably beginning in 2011, long-term oversupply threats remain minimal," the M&M report states adding that there are exceptions.

"The Clairemont/Linda Vista Mission submarket could face future oversupply.

In addition to the 240 units that will be delivered in the area this year, more than 2,400 apartments are planned. Vacancy in the submarket ended the first quarter at 6.2 percent, 100 basis points higher than one year earlier," the M&M report said.

A total of 1,600 apartment units are projected to come on line in the county this year. An average of 800 units have been delivered annually during the past three years.

The county's planning pipeline currently contains 4,650 apartment units and more than 8,500 condominiums are proposed -- some of which may be delivered as rentals if challenges persist in the housing and mortgage markets. However, not all of these will be built.

Local rents have remained essentially flat in recent quarters year-over-year though the first quarter, asking rents receded just 0.5 percent to $1,304 per month, and effective rents ticked down 0.7 percent to $1,240 per month, M&M reported.

Asking rents among Class A properties have fallen 0.3 percent in the past year to $1,623 per month, while Class B/C asking rents have dipped 1.1 percent to $1,109 per month.

M&M says landlords are expected to keep rents and concessions near current ranges this year, with asking rents dipping 0.5 percent to $1,300 per month and effective rents retreating 0.7 percent to $1,240 per month.

In 2009, asking and effective rents contracted 2.8 percent and 4.1 percent, respectively.

MarketPointe placed the average rental rate at $1,315.in March.

A newly published USC Lusk Center Casden Real Estate Economic Forecast said while the Los Angeles and Orange County for example will continue to see rent declines through next year, San Diego County will see flat to modestly increasing rents by next year.

M&M reports concessions have increased to approximately 16 days of free rent per year at the end of the first quarter -- up from 14 days of free rent a year earlier.

"With the market beginning to stabilize, leasing incentives should remain minimal through this year, although offerings could prevail at newly built properties and in surrounding areas," the M&M report adds.

As for sales activity, M&M report says the transaction outlook is poised for a modest rebound this year.

"Investment activity in San Diego has decelerated approximately 25 percent on a year-over-year basis, but more recent velocity trends indicate the market has largely stabilized," the report continues.

The report concludes that investor demand should accelerate as the economic outlook brightens.

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