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Reports: Regional apartment market remains strong

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Reports by Marcus & Millichap and Cassidy Turley say San Diego will continue to have a strong apartment market, but new construction could soften things a bit.

M&M said until and unless there is a flood of new units, “San Diego apartment owners who were focused on maintaining low vacancy will shift their attention to lifting rents when leases roll over this year.”

M&M said as home prices climb, apartment landlords of Class A properties will see greater room to elevate rates without losing tenants to the housing market.

“This year, operators will become more aggressive with rent increases to take advantage of low vacancy,” M&M writes. “Average effective rents will rise 4 percent to $1,464 per month, doubling last year’s 2 percent increase.”

Cassidy Turley reported the average apartment rental rate climbed from $1,361 in March of 2012 to $1,388 in March of 2013.

Rental rates, CT said, are expected to increase between 3 and 5 percent in 2013 led by an improved employment market.

Since the apartment market began improving within the past 18 months, M&M said newer properties have recorded only modest rent growth because of new competition and a relatively affordable housing market.

M&M said developers are projected to add 2,600 apartments in San Diego County, expanding inventory by 1.1 percent this year. More than 1,900 of the new units will be market rate, while the remainder will be affordable.

M&M said a total of 2,700 units came online last year. CT reported 4,016 units are currently under construction countywide.

The Casa Mira View development along Interstate 15 in Mira Mesa, which will have more than 1,800 units at buildout, is the largest apartment project currently under construction.

M&M said there will enough apartments coming online to bump up the countywide vacancy rates by 80 basis points in 2013 to end the year at 4.3 percent. The rate climbed by a more modest 30 basis points in 2012.

Both the M&M and CT reports agree that San Diego County remains one of the strongest apartment investment markets in the country.

CT reported that nine properties of 100 units and larger traded hands over the last six months, totaling $392 million. The average price per unit was $197,108. During the same time, 77 transactions (10-99 units) were recorded totaling $223 million countywide. The combined transaction volume in the fourth quarter of 2012 and the first quarter of 2013 were more than double the previous six months for properties $5 million and greater, a trend that is expected to continue.

The largest sale cited by CT was that of the 540-unit Reserve at 4S Ranch, a property that traded on the last day of last year for $147.5 million to a JP Morgan Chase (NYSE: JPM) entity.

The 336-unit Missions of Sunbow in Chula Vista sold for $90 million in February to a group largely comprised of South Bay investors.

Although these are two large sales, the desire of landlords to hold onto their properties appears to have kept big transactions to a minimum.

M&M said the fact that large apartment properties rarely come on the market seems to make them all the more coveted by investors, particularly if they are in strong locations.

“Apartment properties in San Diego will remain a staple of Southern California portfolios as owners shuffle assets to meet evolving investment goals. Buyers approaching retirement or targeting long-term hold properties will stay as close to the coast as possible in beach cities of Pacific Beach, Mission Beach and La Jolla,” M&M writes. “Other attractive areas will include the ring of popular neighborhoods around downtown, such as North Park, South Park and University Heights.”

CT agrees the coastal areas will see the highest demand by prospective buyers and tenants, who covet the coastal locations — despite being the most expensive.

“North County Coastal submarkets will continue to outperform the rest of the county with East County submarkets remaining the most affordable,” CT concludes.

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