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San Diego County apartment rents flattening, vacancies rising

While the average rental rate is nearing $1,200 in San Diego County, the vacancy rate has softened up slightly from last year, but is still considered very tight, according to a real estate information company.

One of the causes of rising rents and still-low vacancies is that not enough housing is being built, according to Russell Valone, president of MarketPointe Realty Advisors.

Valone said while there was a fair amount of apartment construction in 2000 through much of 2003, it has tapered off since then because apartment developers are having to compete head to head with condominium builders.

"It's difficult to build anything but Class A apartments, and those developers have to compete with condo developers for the land, and that's hard to do," Valone said. "It's just plain tough to get an apartment built today. It's tough to find a lender who will lend on it."

While the overall vacancy rate was 3.26 percent at the time of MarketPointe's March survey, that is still less than the 5 percent figure considered by the industry to be a market that is roughly in balance. The vacancy rate was 2.76 percent in March 2004 -- significantly tighter than it is today. Still 3.26 by any standard is a very low level.

The research firm surveyed 115,086 units in 809 complexes with 25 or more units for reports issued every March and September.

"Considering the fact that historically low mortgage rates continue to lure many renters into homeownership, vacancy rates are remarkably low thus demonstrating the overall strength of the San Diego County housing market," the report states.

The $1,170 per month weighted average rental rate, while higher than many parts of the country, only represented about a 2.8 percent increase from a year ago.

While rents have flattened recently, they have gone up an average of 75 percent between the March 1996 and the March 2005, according to the reports. The research firm does predict a further leveling off, however.

Condominium conversions have become a significant part of the equation, but just how significant has been the subject of debate. Many have expressed fear that the conversions are a major threat to the rental market, but MarketPointe insists that it is nothing so dire.

"While many are concerned about the level of activity in the conversion market, that represents only about 2.5 percent of the rental housing stock," according to MarketPointe. "Moreover, while many criticize the development of condominium conversions as increasing the cost of living and driving out long-term renters, it is our opinion that condominium conversions offer an affordable alternative to rapidly escalating new home prices and allow renters the opportunity and benefits of homeownership that they otherwise might not be able to obtain."

Meanwhile, nearly all the apartment units being constructed are in the luxury category. These new units also tend to be about 21 percent larger than their older cousins.

There also appears to be a direct correlation in the MarketPointe survey between the age of the unit and higher rents.

"In fact units built since 1998 are averaging $1,581 per month, compared to just $1,091 per month among units built prior to 1998, reflecting a 45 percent premium for newer units," the report stated.

MarketPointe added that the number of rentals in the $1,200 and more range are far outpacing the other market segments.

The newer units may be an average $490 more expensive, but MarketPointe said the upscale units continue to be absorbed quickly.

The studio apartment had an $866 average and was the only category that averaged less than $1,000 per month. An average one-bedroom unit had an average $1,020 rent and a two-bedroom unit had an average $1,558 monthly rent.

In terms of area, the Uptown East part of the city of San Diego checked in with a 4.07 percent vacancy rate. While that was the largest vacancy rate recorded in the county, it is still considered to be a very healthy figure. The Uptown East market posed a $1,048 average rental rate.

The North County Coastal market was the tightest market, perhaps because little new building is being allowed in many areas. The market had a 1.24 percent vacancy rate in March, despite a $1,505 average rent.

Along the Interstate 15 Corridor, the vacancy was also low at 2.11 percent. The average rent in that market was $1,252 in March.

Downtown San Diego, which is much better known for its condominium projects than its apartment developments, had a vacancy of 2.99 percent at the time of the survey. The average rental rate in that market was $1,371 in March.

South Bay rents are generally cheaper than other parts of the county at $1,048 per month, but eastern San Diego city checked in with an average of $951 per month. Eastern San Diego county checked in at $998 per month.

MarketPointe identified 90 projects that have the potential of adding 16,537 new rental units to the county's inventory.

Two things are unclear. One is how many of these units will actually be built. The other is how many of these new units will be converted to condominiums before, during or after they are completed.

Of those 16,537 new rental units, just 2,871 units are in the affordable category.

The South County has the largest number of prospective units with 4,490. Only 60 of those units have been designated for low-income households.

Pardee Homes has a 1,388-unit project and 760-unit project, both in the OceanView Hills master plan in Otay Mesa; and a 612-unit project in the Dennery Ranch master plan.

The San Diego Central market is second in number of potential units with 3,532 apartment units in the pipeline, of which 609 are affordable units.

The third most active part of the county in terms of new apartment construction is projected to be the Highway 78 Corridor in North County with 2,383 units in the works. That market has 536 units that have been designated for low-income users.

The I-15 Corridor has 1,885 units in the works, none of which are in the affordable category.

The largest project in the works is an eventual 1,750-unit project called Casa Mira View by Pardee Homes along the east side of Westview Parkway between Mira Mesa Boulevard and Capricorn Way.

The North County Coastal market had 2,202 units, including 1,143 affordable units. Here again, Pardee has the largest project with a 694-unit proposed development in the Carmel Valley area. MarketPointe lists this as one of Pardee's affordable projects.

Related Articles:

In the hottest markets, renting is the real bargain (Mar. 22, 2005)

City manager's report shows extraordinary growth of condo conversions (Mar. 10, 2005)

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