A lack of housing supply and rising rents have fueled San Diego’s multifamily housing market, making it a great time to own or sell apartments. But an influx of new units downtown could dampen that submarket's vacancy rate at the same time that other developers have struggled to get approvals outside of downtown.
Just 2 percent of all multifamily units in San Diego were vacant this fall, and rents are rising — the average apartment cost more than $1,700 in September.
There has been a notable shift toward more units renting for more than $2,000 per month and fewer units available under $1,400, according to MarketPointe Realty Advisors’ September rental trends report, which was based on a survey of more than 131,000 units.
Perhaps those who are benefitting the most in this market are recent buyers of Class B and C properties with 25 to 50 units who are renovating their properties and then charging higher rents.
“A lot of those were built to last 20 or 30 years ago, and they were only built to last so long,” said Russ Valone, CEO of MarketPointe.
The firm said there’s a vacancy of about 1 percent at midyear in Class C units in the metro San Diego area where rental affordability is a concern. Vacancy will likely also stay low in El Cajon, Santee, Lakeside and Escondido, where it’s currently less than 2 percent, because there is no new construction in the region.
The rise in rents has driven transactions for Class C properties, according to Marcus & Millichap’s third quarter multifamily research market report. But cap rates have reached historic lows, making it challenging for buyers to find properties to renovate.
Downtown, however, is in a class by itself. There are 3,000 units in the pipeline in downtown alone, far more than anywhere else in the county. And with rental rates pushing against renter affordability, most experts expect the market to slow in 2017.
While that should create more opportunity in suburban markets, developers still face big hurdles.
“Outside of downtown, it is extremely hard to get approvals for any dense smaller unit housing projects,” said Norm Miller, professor at the University of San Diego School of Business. He said developers are having a challenging time getting projects approved.
SANDAG, the regional planning agency, projects the region will grow by 1 million people by 2050, and that means we’ll need 500,000 more jobs and an additional 330,000 housing units.
The Building Industry Association of San Diego worries that San Diego has not kept pace, and hasn’t been building the 12,000 housing units needed annually to meet demand. In 2005, more than 15,000 permits were issued. That number dropped to a low of less than 3,000 in 2009. It has rebounded, but at 10,000 permits this year, it still is below expected demand.
San Diego isn’t alone. The most recent Allen Matkins/UCLA Anderson Forecast pointed out that trend of not-enough-housing carries throughout the state: “California housing is seriously underbuilt and that household formation is happening faster than new building.”
The recent fire in Oakland that killed more than 35 people was blamed, in part, by the lack of affordable housing in the city. People were living in the converted warehouse because they couldn’t afford rising market-rates.
Studies have also shown millennials are pushing off big life events for a few years — marriage, children, buying a home — so they’re more likely to rent longer.
These changing demographics are driving the design of these new projects, which are highly amenitized to appeal to millennials, who may be willing to forego bigger units for properties that have spas, large gathering areas, kitchens, theaters and more.
“They offer so much more than the garden apartment used to offer,” Valone said.
Join Our City and the region’s top experts for a discussion on multi-family housing supply and demand and how to get projects approved, Jan. 18. Click here for details.