The 181,277-unit market-rate, investment-grade San Diego apartment market continued through mid-2012 with low vacancy and positive rental growth. Net absorption picked up, and there has been some new construction. “San Diego continues to be one of the strongest multi-family investment markets in the country,” Cassidy Turley notes in their 2012 forecast.
San Diego’s second quarter 2012 vacancy rate was 2.9%, according to Reis, unchanged from the prior quarter and down 80 basis points over 12 months. The rate was low enough to earn San Diego the eighth-lowest rating of Reis’ top 82 apartment markets in the second quarter. The Class A rate is reported at 4.2%, up 10 basis points over the quarter and down 70 year-over-year. The Class B/C rate is reported at 2.0%, down 10 basis points for the quarter and down 100 year-over-year.
“According to MarketPointe Realty Advisors, the countywide vacancy rate dropped 64 basis points to 4.43% in March 2012. This is compared to the 5.07% that was reported in March 2011,” Western Real Estate Business reported in their July 2012 Market Highlight. The general “strengthening of the rental market can be largely attributed to the growing number of people shifting their views of renting versus owning.” this source noted. Cassidy Turley notes in their 2012 forecast that “vacancy rates are expected to tighten even further and dip as low as 4.0% by year-end 2012.” Reis reports vacancy has not reached the 5.0% mark here in at least the 10 years ending in 2011, and during that time, only came close to it during the recession years of 2009 and 2010. San Diego is considerably outperforming the national market, with its 4.7% vacancy rate, as well as the West region, at 4.0%. The rate is forecast to remain below 3.0% in 2012 and the rest of the forecast period.
SUPPLY AND DEMAND
The second quarter saw 427 units of net absorption, Reis reports, bringing the year-to-date total to 731 units. For a market without much construction, that is not a bad performance. Net absorption averaged approximately 300 units per year from 2002 to 2011, Reis reports, due in part to a surge of apartment to condominium conversions in the mid-2000s. Class A apartments posted 322 units of net absorption in the second quarter; Class B/C apartments saw 105 units. The respective year-to-date totals are 445 and 286 units. Clearly, San Diego has an appetite for competitive multifamily space, but not at the cost of the middle of the market, which shows some strength.
Development remains modest; as the average completion total from 2002 to 2011 was about 1,600 units per year. Reis reports a mere 446 units completed here in 2011. As of the latest construction data, Reis reports 502 units completed thus far in 2012 in three projects. The leading completion is the 379-unit Domain by Alta, which finished in April in the Clairemont/Linda Vista submarket. Also completed are the Latitude 33, with 82 units, which finished in the Escondido/San Marcos submarket in June, and the 41-unit building at Columbia & Fir Streets Downtown, finished in August. There are only two projects under construction, the Ariel suites in Escondido/San Marcos, with 224 units, and Broadstone Little Italy, with 199 units, in the Ocean Beach/Point Loma submarket, each due to complete in December 2013. But planning is extensive.
“Locations throughout the county attracting the highest developer interest and already witnessing new construction activity are centrally located, mixed-use urban areas. This is no surprise as walkability and easy access to transportation is highly sought after by the younger generation of renters,” according to Western Real Estate Business. Reis forecasts net absorption to exceed new construction substantially; a total of 8,524 units are forecast to be absorbed net from 2012 to 2016, with only 6,480 new units added to the market in that time.
Rents posted solid gains in the second quarter of 2012, Reis reports. The average asking rent increased by 1.0% to $1,384 per month and the average effective rent increased 1.2% to $1,352 per month. The year-over-year gains are 2.5% and 3.3%, respectively. Asking and effective rents gains for 2011 as a whole were 2.0% and 2.3 %, respectively. Reis reports a second quarter Class A asking rent of $1,712 per month, up 1.1% for the quarter and up 2.2% year-over-year. The Class B/C rent is reported at $1,178 per month, up 0.9% for the quarter and 2.5% over 12 months. National asking and effective rents increased by 1.0% and 1.3% during the quarter, Reis reports, while the West region showed asking and effective gains of 1.0% and 1.2%, to $1,225 and $1,178 per month.
“The San Diego County rental rate increased 2.56% from $1,327 per month ($1.52 psf) to $1,361 ($1.57 psf)” from March 2011 to March 2012, Western Real Estate Business reported. “North County coastal areas like La Jolla, Del Mar, and Encinitas continue to demand the highest rents, averaging $1,698 per month, or $1.79 psf. Of the coastal communities, the La Jolla and UTC submarkets are anticipated to outpace the rest of the county in rent increases over the next two years. On the higher end of the price scale, coming in at second is Central County at $1,460 per month, or $1.75 psf, with Downtown commanding $1,710, or $2.09 psf, which is a slight premium over the North County coastal submarkets,” this source stated in their July 2012 report.
Reis predicts average asking and effective rents to increase by 2.5% and 3.4% in 2012, finishing the year at $1,402 and $1,373 per month, respectively. Further gains at about the 4.0% mark are on tap for 2013, Reis reports, while even stronger gains, surpassing the 5.0% mark, are estimated for the out years of the Reis forecast period.