San Diego Rent Control

San Diego Rent Control

Quick Summary

  • Californian’s will get to decide in the November ballots the fate of the Proposition 10,  the so-called “Affordable Housing Act (AHA), which would allow for cities to adopt rent control.  The AHA seeks to revoke the Costa-Hawkins Rental Housing Act, which prohibits rent control on buildings built after February 1995.
  • Many San Diegan’s believe this would provide an answer to our housing crisis, however, many professionals and economists disagree. This initiative is bad for homeowners and renters and will make California’s housing crisis worse.
  • It is estimated that if Proposition 10 is passed, property values will fall 20-25% across the state of California.
  • Experts believe rent control would be detrimental to the San Diego economy and would discourage new housing development, further exacerbating the housing crisis.
  • Experts also argue that rent control would eliminate many incentives to own rental properties. This could cause harm to both owners and tenants.
  • Rent control has already been adopted in several cities around the United States, and the results have proved to be harmful to the overall economy by shrinking supply of affordable housing and driving up rental market prices.
  • National City is the first city in San Diego County to try and pass a rent control ordinance (Proposition W). If passed, this could be a watershed moment for other cities in the county to pass such ordinances, further inhibiting our housing supply and placing both renters and owners at greater risk.

Continue reading below to learn more about rent control and the effect it would have on the San Diego economy.

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San Diego Rent Control

San Diego is facing a profound housing crisis. Rents keep climbing and supply keeps falling desperately behind demand. According to the San Diego Union Tribune, in March of 2018, the average rent in San Diego County hit an astonishing record of $1,887.

San Diego now ranks as the ninth most expensive market in the United States. Many San Diegan’s are finding it increasingly hard to afford rent and are turning to the government for answers. Their solution? Adopt the Proposition 10 (Affordable Housing Act) and repeal the Costa-Hawkins Rental Housing Act which would allow cities like San Diego to decide on their own rent control measures. The initiative received more than 650,000 signatures and will be placed on the November 6th ballot, giving Californian’s the option to decide on this issue.

Many economists and experts agree that rent control offers no benefits for all parties involved and would be disastrous for our local economy. How would rent control affect San Diego? Let’s take a closer look at the various players in this debate.

What is Costa-Hawkins?

Costa-Hawkins is a California state law that was adopted to counter vacancy control ordinances and spur new construction of single-family homes.

It limits how cities set rent control in two ways

  1. It prohibits cities from putting a rent cap on single-family homes or apartment buildings built after February 1995.
  2. It gives landlords the right to raise rent prices to market value when a tenant moves out, otherwise known as a vacancy control.

Costa-Hawkins does NOT outlaw rent control. Cities like Los Angeles and San Francisco have been able to adopt some forms of rent control but within the state law.

Source: Union Tribune 

What Is Proposition 10 (Affordable Housing Act)?

The affordable housing act has three main objectives

  1. It aims to restore California’s cities and counties to develop and implement local policies that ensure renters can find and afford decent housing in their areas.
  2. Improve the quality of life for millions of California renters and reduce the number of people who face critical housing challenges and homelessness.
  3. Repeal the Costa-Hawkins Rental Housing Act

Supporters of this bill hope that if passed, each California city would begin to pass their own rent control ordinances. In turn, they believe rents will go down, and that many Californian’s will be able to find affordable housing. They believe that increased rents are a result of landlords fueled by monetary greed.  This act would allow cities to prevent landlords from increasing rents once a tenant leaves (among other things). Curious what those other things are? We’ll break down what that could look like later in this article with National City.

Source: Affordable Housing Act Website 

While it is no question that rents are sky-rocketing and that a solution needs to be reached – allowing cities to pass rent control ordinances is not the answer. In fact, I would argue rent control would just exacerbate the problem.

 

Why Rent Control Won’t Work

A recent study by the Legislative Analysts Office (LAO) looked at Proposition 10 and said it would lower ALL property values so much so that the state stands to lose 10’s of millions of dollars over the next few years as a result of lower property taxes.

Repealing Costa-Hawkins would lead to shortages in both the quantity and quality of housing. Profits are what incentivize landlords to maintain a building in good shape. If rents are capped at a certain limit, what is the incentive for landlords to maintain the building?  Buildings would become neglected and long-term improvements wouldn’t be invested in. This can create unsafe living conditions for tenants.

Rent control would limit property owner’s potential cash flow to dangerous levels. When you think about things like increased expenses and rising interest rates, this could put owners at risk. If the owner can’t make their mortgage payment because rents have been caped, they risk losing their property. This could create a domino effect amongst many property owners. Tenants might also have to look for a new place to live.

There are already many risks associated with owning a multi-family building, so if you factor in rent control, what is the incentive to buy a place? Owners might opt to convert their building into condos if they do not see enough cash flow to turn a profit. This would take away even more rentals from the San Diego market.

In 2016, the Union Tribune asked 14 experts whether they believed rent control would benefit the San Diego economy, all 14 experts answered, “No”. They cited everything from shrinking the supply, decreasing affordability long-term, to driving tenants out to repurpose buildings.

History has shown us that rent control doesn’t work. Look at New York City in the 1970s and 80s. Landlords simply stopped maintaining the buildings, amenities were no longer looked after, living conditions became dangerous, and eventually, entire streets blocks were left vacant. New York’s neighborhoods fell into an economic recession and investment was at an all-time low. 

The Impact on Development

What about developers and investors? Would the same incentives remain for them to continue to build new construction if they knew property values would be artificially capped?

A recent CoStar report discussed the impact that rent control could have on development.

“Many developers are concerned about the economic impact there will be on new development if it is subject to rent control… it would change the “whole economics” of how developers view potential development opportunities… It’s hard enough and costly enough for a developer to make a decision to build housing, and now they are put on notice that the housing may be subject to rent regulation… they may very well be unwilling to make those tough decisions of being invested in building a development”.

If developers are unwilling to build new units, which San Diego desperately needs, that is a losing scenario for all parties involved. This would place us further behind meeting the demand for housing. Alan Gin at the University of San Diego argues,

“the problem is the lack of construction of both single-family and multi-family residential units. Controlling rents would reduce the incentive to build more multi-family units”.

If developers see fewer incentives to build housing, they may turn to other development avenues like commercial, retail, office, etc…

The Building Industry Association recently commissioned a study that found that up to 40 percent of the cost of a new home is attributable to the 45 agencies that govern home building in California. This means that on a $5,000,000 project, $2,000,000 is spent paying these 45 agencies that govern homebuilding. Legislation like the California Enviornmental Quality Act (CEQA), while once good intentioned, has proven to be a major roadblock to countless developers.

Rent control not only discourages development, but it would contribute to less affordable housing developments being built. Austin Neudecker of Rev points out that rent control would increase the prices for those who cannot find a controlled unit. New York City and San Francisco are prime examples where soaring rental prices and rampant abuse of rent-controlled housing exists.

Another big concern with rent control is tenants deciding to stay for extended periods of time in their current unit or subleasing it out. This makes it harder for people who need affordable housing to get into units.

A 2017 Standford Study and this LAO report also concluded that rent control does more harm than good. I recommend giving these a read, they provide some valuable insight into what happened in San Francisco and their attempts at rent control.

 

National City (Proposition W)

Rent control is much closer to home than you may think. The National City Rent Control and Community Stability Ordinance (Proposition W) will be voted on November 6th. This ordinance will halt construction, harm the local economy, and do nothing to help with the housing crisis.

Here is a quick highlight of the ordinance’s pitfalls courtesy of ProtectOurHousing

  • Caps annual rent increases at an amount equivalent to the increase in the Consumer Price Index (CPI), but never more than 5%.
  • Rolls rent back to Spring 2018 for existing residents that were in their units at that time. This means if you didn’t increase your rents then, you’re locked into those rates.
  • Upon receipt of a petition by a tenant or rental owner, the rent may be adjusted upwards or downwards in accordance with the Measure.
  • Creates a five-member rent board. At least three members must be tenants in controlled units. There are no seats specifically for property owners. You could, in theory, end up with a 5-member tenant board.
  • Creates a per unit fee to support the Rent Board, starting at $120 per unit per year (most existing Rent Boards charge $350 per unit per year). That comes right off your bottom line, while they’re already caping your rents!
  • The City Council and City Manager shall have no authority to oversee, supervise, or approve the Rent Board’s budget.
  • Requires Rent Board approval for all evictions (little to no recourse should they deny it).
  • Property owners who fail to comply with provisions in the Rent Control Measure can be held liable for damages including emotional distress.
  • The Rent Control Board will make legal assistance available for tenants related to evictions, Board petitions, hearings, and appeals.
  • Enacts Just Cause Protections, limiting an owner’s right to require a tenant to vacate a unit. This makes the removal of problematic tenants very difficult, leaving good residents to suffer. 
  • Withdrawal of units from the market requires 120 days to 1-year notice and requires relocation assistance of $7,000 and $10,000 if they are elderly, disabled, or have minor children.
  •  If Costa-Hawkins isn’t repealed but Prop W passes, ALL rental units in National City must pay $80/per year/per unit for Just Cause and also will be subject to relocation fees.
  • Owners who move into their own units will also be required to pay relocation costs.
  • Duplexes and homes with “granny flat” rentals will be subject to rent control unless the owner lives in one of the units.
  • Prohibits Ratio Utility Billing Systems (RUBs), thereby hurting conversation efforts.
  • If you decide to renovate the property and put a bunch of money into it, that evicted tenant will have first right of refusal at the market rate which they rented it at before.

As you can see, this list is quite overwhelming. National City could very well set the tone for future rent control ordinances throughout San Diego County. It is imperative this bill does not pass in order to save future cities from this same disaster. There are approximately 70,000 residents in National City and 70% of the population rent. With 25,000 reigstered voters, it is important they are informed of the impact this legislation would have on them.

What A Failure to Kill Prop 10 and Prop W Means for San Diego

A failure to kill Proposition 10 and Proposition W  would create a cascading effect. As these fights continue to go on in cities throughout San Diego County, the costs for various associations and professionals to go out and amend these ordinances to find workable solutions would become astronomical. We would be stretching ourselves far too thin. We need to send a clear message by defeating Prop 10 and Prop W and protecting Costa Hawkins.

It’s important to remember that if Prop 10 passes, that does not mean rent control is enacted. It simply allows cities the right to pass ordinances similar to what is trying to be done in National City.

Final Thoughts

Think about this for a moment. If produce is too expensive, should we limit how much the farmer makes? What about if Apple Computers are too expensive? Do we start paying people who make them less?

The same concept applies to landlords when being asked to accept rent control. Just because rents are going up, it doesn’t mean the responsibility falls on owners and developers.

Or how about this

Rent Control does nothing to empower homeownership. It doesn’t give us more supply and furthermore, it keeps you and your future heirs in a constant state of renting. Is that really what you want?

More permanent solutions lie within increasing zoning, reducing the time it takes to build, and expanding our public transit system and building communities around those transit centers.

Lowering parking space requirements could prove to help as we enter a future where vehicle ownership could decline. Developers fees should be prorated by size. As it currently stands, big and small units face the same fees, which gives developers no incentive to build smaller, less expensive units.

These are just jumping off points but could be great starts to solving what is arguably one of San Diego’s biggest dilemmas. I will be updating this post as more developments arise, so please stay posted.

More Information

San Diego Union Tribune “What’s the Deal With Rent Control” 

EconoMeter Critics Panel Report

Rent Control is No Answer to California Housing Crisis 

Where you can get involved

National City Protect Our Housing

If you know people who have property, or better yet reside in National City, have them vote no on prop W!

 

Written by Blake Imperl in collaboration with Curtis Gabhart

Curtis Gabhart and Gabhart Investments, Inc – 2018 All Rights Reserved
The material contained in articles that appear on gabhartinvestments.com is not intended to provide legal, tax or other professional advice or to substitute for the proper professional advice and/or commercial real estate due diligence. We urge you to consult a licensed real estate broker, attorney, tax professional or other appropriate professionals before taking any action in regard to matters discussed in any article or posting. The posting of an article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

San Diego Rent Control and Vacation Rental Update Lunch & Learn

San Diego Rent Control and Vacation Rental Update Lunch & Learn

San Diego Rent Control and Vacation Rental Update Lunch & Learn

San Diego Rent control and restrictions on short-term vacation rentals could have devastating impacts on the San Diego real estate market and economy. Are you an investor, real estate professional, landlord or even a resident that is interested in discovering how this could impact you? It’s time to educate yourself and let your voice be heard. 

In this interactive and informative 60-minute class, Curtis Gabhart and an expert panel of speakers will present an in-depth overview of both San Diego rent control and restrictions on short-term vacation rentals.

Topics include

  • San Diego Rent Control
  • National City Rent Control
  • Financial modeling displaying how rent control could impact property value & NOI
  • Short-term vacation rentals impact on the real estate market

San Diego Rent Control

Guest Speaker Bio’s

Molly Kirkland: Molly has been serving the San Diego region in the governmental affairs field for well over a decade. For nearly 7 years, she has served as the Director of Public Affairs for the San Diego County Apartment Association (SDCAA).  Prior to working with SDCAA, Molly worked in Government Affairs and Communications for the San Diego Association of REALTORS.

Richard A. Snyder, CPM: a Real Estate Professional for over 30 Years, is the President and Owner/Broker of R.A. Snyder Properties, Inc., located in San Diego California, where he is a recognized leader in the Real Estate Industry. Rick is a Past President of San Diego County Apartment Association and he continues to lead as Co-Chair of the local effort to defeat Rent Control in National City and the local No on 10 Statewide campaign to protect Costa-Hawkins.

Christine La Marca: is a San Diego native with over 20 years of residential property management experience.  She is responsible for the day-to-day management of her family’s real estate portfolio. She is the Immediate Past President of the San Diego County Apartment Association, and she is currently still actively serving the Association as Co-Chair of the local No on 10 Statewide campaign to protect Costa-Hawkins and the local efforts to defeat Rent Control in National City.

Check out Curtis’s San Diego rent control blog post to catch yourself up to speed before you attend.

Click Here to Check it Out

Date

Tuesday, September 18, 2018

12:00-1:00PM

Location

Keller Williams Carmel Valley

12780 High Bluff Rd Ste 130

San Diego, CA 92130

We would be thrilled if you could join us for this special event. Lunch will be provided to those who RSVP in advance. Space is limited so please register as early as possible. Additional details are listed below.  To RSVP, follow the ticket prompt below confirming you will be in attendance or recommend someone else from your office if you are unable to attend. Thanks very much!  We hope to see you there!

 

The presentation will be hosted by Curtis Gabhart, CCIM 

Curtis Gabhart has been a successful Real Estate professional for more than a decade. He has a Certified Commercial Investment Member (CCIM) designation from the CCIM Institute. He is a Director at Keller Williams Commercial Brokerage and President of Gabhart Investments, Inc, a privately held real estate investment firm that manages a syndication of private investors, specializing in acquiring and renovating single and multi-family properties. He also serves on the Commercial Advisory Board at the University of San Diego Burnham-Moores Center for Real Estate and he teaches commercial real estate courses for the California Association of REALTORS® and San Diego Association of REALTORS®. He has been recognized by members of Congress, California State Senators, the City of San Diego, and had a day named after him in the County of San Diego for his community service and dedication to the community. He was awarded as the Dealmaker of the Year for 2015 in Retail and Multi-Family category.

The Foundations of Commercial Realty

The Foundations of Commercial Realty

Foundations of CRE

Foundations of Commercial Real Estate: Players & Properties

Commercial Real Estate

If you think about it, there really are only two facets to dealing in property; the people, and the properties.  Everything falls into or between these.  So let’s begin your entrance into the world of commercial real estate (CRE) and take a deeper look at both of categories.

 

Many people who are commercial developers have a background in brokerage. While there are many similarities, the largest key difference between the two is that emotions play a much smaller role in commercial real estate as compared to residential real estate.  Buyers, sellers, tenants & landlords are much more motivated by profit than by individual preferences.  Of course, commercial real estate transactions are often much more complex and take longer to complete as well.

 

Now, let’s consider the major players involved in the commercial real estate industry:

 

The Major Players

Commercial Real Estate Key Players

Real Estate Brokers

As anywhere else, the job of the broker here is to find and facilitate a transaction between a buyer and a seller.  Most who play this role in CRE call themselves brokers, however, this is not necessarily 100% accurate as some people hold a broker’s license, while others hold a salesperson license.  Brokers working for buyers, more often than not, need to find properties suitable for purchase outside existing MLS listings.  Whereas brokers working to sell a property need to target a high niche segment of buyers and investors.  As commercial real estate transactions are quite complex, brokers may or may not be involved in the entire spectrum of the transaction.  Additionally, they may or may not refer other professionals during the course of the transaction.

The key thing for residential realtors to realize is, that their previous buyers may prefer to deal with or through them, rather than a commercial real estate broker who they don’t know.  Thus, it is highly recommended for residential realtors to joint venture with or refer to a commercial broker who has the experience….. that their clients can be served without losing business or relationship value.  (Let us know if you are looking for tips on evaluating the right commercial real estate brokerage to associate with and how to negotiate with them, we will have an article on that soon.

Plus, it is crucial to note that the Code of Ethics laid out by San Diego’s Association of Realtors ® (SDAR) recommends against brokers practicing beyond their expertise.  For more details, refer to their publication here.

 

Lenders

As with any real estate transaction, finance needs to be secured.  While most buyers have their own source of financing, the broker needs to have relationships with various types of lenders; construction, acquisition, equity and permanent.  These relationships are useful during preliminary valuations and can also be crucial in enabling financing of the final transaction.

Just like most commercial real estate players, it’s important to have a lender who specializes in the product type you are dealing with.

 

Architects, Engineers & Planners

During development and redevelopment (and sometimes even leasing) buyers may need the assistance of any of these professionals, so it is important that a broker has developed such relationships beforehand to enable a smooth transaction.

 

Accountants

As the profit motive is significantly larger in commercial real estate deals, buyers and sellers will often want financial and tax advice.  This is usually done by consulting with their own accountants and financial advisors, which is recommended, however, when appropriate, it can be helpful for the broker to be involved in these transactions so the broker can better advise on the real estate portion of the transaction based on the items the principal financial advisor recommends.

Attorneys

There is no doubt that legal advice will be needed in any commercial real estate transaction and as a broker, unless you hold a license in law, you are not permitted to provide that advice or draft legal drafts and deeds.  It is, again, important that the commercial real estate broker has established relations with competent lawyers who can facilitate transactions rather than killing them.  Are you looking for such attorneys to work with?  Let us know and we would have happy to provide references.

Appraisers

Sellers want appraisers’ valuations in order to establish a selling price.  Buyers pay for appraisers as mandated by lenders before they extend the loan in order to purchase the property.  Appraisers need to be not only specialized in commercial real estate, but also in the type of commercial real estate as the property under consideration.

 

Others

Depending on the type of transaction, various other professionals may need to be involved.  This will change from time to time and here are a few scenarios elucidating the requirement of additional outsider help:

  • Rezoning
  • Historical
  • Traffic
  • Environmental
  • Business Brokerage

 

This brings us to the closure of this part of the article.  Do you know any of these professionals who you would like to recommend?  Are you looking for any such professional for your transactions in San Diego Commercial Real Estate?  Or do you just have some questions?  Drop a comment and share; we would love to hear from you.

 

San Diego Commercial Property Types

San Diego Commercial Property Types

Commercial Properties

As mentioned already, commercial real estate transactions are much more complex than residential real estate ones.  As a result, brokers often need to be specialized within specific types of properties of commercial real estate.  However, if the geography is a small market, it is possible for the broker to service most segments within commercial real estate.  But in more larger markets, including San Diego Commercial Real Estate, it is very difficult to know the market for every product type. Make sure the broker you are working with has specific experience in the type of property that you are interested in.

 

While there are many types of properties with the San Diego Commercial Real Estate Industry, the major ones are ;

 

  • Multi-Family 5+ Units (more on this later)

  • Office

  • Industrial

  • Retail

  • Land

 

Some of the smaller segments include hospitality, storage, and multifamily, which is last in this list, but the largest within this category of sub-segments.  Interesting to note that Gabhart Real Estate Advisors has experience within most of these segments in San Diego!

 

Now let’s consider each major type of property within the commercial real estate segment:

Office

Each type of user has their own requirements.  As a broker, it’s important to understand the factors that tenants would consider important for their business. What is important for a law firm is not likely to be important for an IT startup, and so forth. While there are many sub-categories (converted homes, low-rise, mid-rise, high-rise, specialty etc.) within this category, most of San Diego’s office properties fall under the following:

 

Office Showroom

Footfall, window and internal display & layout are the more important variables in this type of property.  In San Diego Office, showrooms often fall within prime localities in order to attract the most customers.

 

Office  Warehouse

As the name suggests, a space suitable for storage of goods (depending on the type of goods) as well as administrative and sales teams. Location, price, and usability are often the most considered points in such transactions.  Certain suburbs of San Diego are well known for office warehouses.

 

Independent Warehouse 

Security, storage capabilities, bonded, climate control is some factors to consider. Most of San Diego’s warehouses are located in suburban areas around the 13 cities.

 

Manufacturing 

Here, often legal matters matter the most.  Free trade zones, licensing for light and heavy manufacturing are of prime importance.  Availability of labor nearby is another key consideration.  Free Trade Zones # 153 in the San Diego / Tijuana area is very popular for various manufacturing concerns for precisely these reasons.

 

Self Storage 

Is another type of industrial product

 

Apart from the factors mentioned in various types of office spaces above, there are various more which apply to some or all such properties.  They are:

 

·         Labor pool availability

·         Proximity to customers

·         Transportation access

·         Price

·         Space configuration

·         Ceiling Height

·         Floor Load

·         Utilities

·         Docking area

·         Sprinkler systems

·         Zoning laws

·         Govt. Incentives (local, state & national)

·         Buy vs. Lease

 

Additional resources recommended by National Association of Realtors ® is available at the website of Society of Industrial and Office Realtors ® www.sior.com and the CCIM Institute www.ccim.com

 

Retail

Again, this is a wider segment than most may imagine and carries various subcategories of properties within the retail real estate segment.  They are:

Single User 

These are used by destination orientated retailers such as banks, retail chains or even grocery shops.

 

Credit Tenants 

When retail is being financed, the tenants business strength is reviewed for considering the tenant’s lease as a security for a loan. Financially stronger tenants in San Diego (and other places) are often granted better terms.  However, these terms may change during the course of tenancy based on the business outcomes of the tenant.

 

Big Box 

Big Box properties in San Diego are limited to large national or International companies.  These are companies that require 25,000 + sq. ft. of space, sometimes even more than 50,000 sq. ft.

 

Small Strip Center 

There is no death of San Diego’s small strip centers.  These are buildings which contain numerous mom and pop shops i.e. retail outlets which are typically owned and operated by the same person.

 

Neighborhood Shopping Center 

Every San Diego neighborhood has one as each such center services within 1-3 mile radius.  There is always several anchor tenants, which vary from cleaners, nail shops, grocery stores et al.  Recent trends observed by the National Association of Realtors ® notes that drug stores used to be a part of such shopping centers, however increasingly they have become stand-alone shops near the parking lot, and as such, are known as an “outparcel”.

 

Community Shopping Center

These buildings service a larger community than neighborhood shopping centers.  They typically service up to a 10-mile radius and house a major retailer such as Walmart, or Movie Theaters etc.  Fashion Valley & Westfield UTC Mall are a few that fit this category.

 

Regional Shopping Center

As implied, these buildings service a wider region and are often known as malls even though they need not be an enclosed space.  Tenants include a variety of regional & national tenants including boutique stores.  The size of such stores ranges between 400,000 sq. ft. and 2 million sq ft.  Beyond that, and they are known as super regional.  However, it is not just the size of the mall that determines if a mall is a super regional shopping center, but also the tenant mix and sales per square foot to ensure that the building is actually popular amongst customers.

 

Specialty Center

These centers vary in size and objective.  They can house certain types of décor such as antique or be geared towards a certain segment such as parents by selling just baby related items.  Belmont Park is an example of a San Diego specialty center, focusing on wearable and accessories for beachgoers.  Surfs up, dude!

San Diego Land for Sale

Land Sales

Land

This is where monuments are made.  Realtors ® focusing on land deals are often (or should be) Accredited Land Consultants, which is a designation imparted by the Realtors Land Institute.  This is a highly-specialized niche within commercial real estate as planners, architects, engineers, developers, and brokers are all often involved.  Some of the key considerations in San Diego’s Land transactions are:

 

·         Zoning

·         Utilities

·         Accessibility

·         Suitable Soil

·         Nearby Amenities


Curtis Gabhart and Gabhart Investments, Inc – 2018 All Rights Reserved
The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of Gabhart Investments, Inc. The material contained in articles that appear on gabhartinvestments.com is not intended to provide legal, tax or other professional advice or to substitute for the proper professional advice and/or commercial real estate due diligence. We urge you to consult a licensed real estate broker, attorney, tax professional or other appropriate professionals before taking any action in regard to matters discussed in any article or posting. The posting of an article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

 

CoStar San Diego Multifamily Real Estate Market Update 2018

CoStar San Diego Multifamily Real Estate Market Update 2018

CoStar San Diego Multifamily Real Estate Market Update 2018

On August 14th, CoStar Senior Market Analyst, Josh Ohl, came into Gabhart Investments to give a presentation on the state of the San Diego Multifamily Real Estate market. In this fast-paced presentation, Josh offered an in-depth overview of the future outlook of San Diego multifamily real estate, an economic forecast, where we are currently at in the market cycle, and much more. This blog post will give you an overview of all the topics discussed as well as many important graphs and charts designed to give you a comprehensive look at the San Diego Multifamily market. Let’s take a deeper look.


Main Take-Aways

  • The rental market is stable with occupancies hovering right around 94-95%. Rent growth year over year is at 4.5%.
  • The lack of housing – we’re simply not building enough to accommodate our city’s growth. San Diego needs 175,000 new units within the decade and is only on pace to build roughly 65,000.
  • The pillars of the economy are stable, even after Qualcomm laid off 1,300 employees over the last couple of months
  • The potential tearing up of NAFTA and what trade tariffs could do with Mexico may lead to issues. We currently do about $6 billion of trading with Mexico every year out of San Diego. Over 100,000 jobs in the region are tied to trade. This may impact the metro to some extent. Tariffs could also impact developers costs with imported materials.
  • We just finished the first half of 2018 with the strongest venture capital investment. $450 million of venture capital investment went into life sciences.
  • The navy is going to be stationing another 15,000 sailors here by 2025 – where they are going to live is a question we will have to answer as we already in a profound housing crisis (remember, they’ll be bringing their families too)
  • The lack of a San Diego Convention Center expansion could drive away Comic Con which just renewed their lease through 2021. That’s about $150million of economic impact.
  • Expansion – we’re into year 9 of expansion but it’s only a matter of time before the bubble does in fact burst.

November Ballot

  • Proposition 10 – Californian’s will be deciding whether or not to repeal Costa-Hawkins and enact the Affordable Housing Act (which would give local jurisdictions the right to pass rent control measures). If passed, this could be a disaster for the California and San Diego Economy.
  • Locally, National City Residents will be among the first city in San Diego County to decide on rent control. The National City Rent Control and Community Stabilization Ordinance will be decided on. The impact could be felt by both landlords and tenants as landlords will lose property rights and tenants will face tougher conditions when finding housing. If you’d like an official copy of the ordinance, let us know in the comments below.
  • What’s going to happen with Qualcomm Stadium? Are we going to put a San Diego State University expansion campus there or Soccer City? Or will we just be looking at the same old obsolete eyesore for years to come?
    • Likely it’ll be the last. Voters may not have time to be familiar on these very last-minute ballot efforts and spending tax dollars on a development isn’t always popular.

San Diego Apartment Fundamentals

apartment supply demand and vacancy in San Diego

  • It generally doesn’t matter what is built, there’s typically going to be a demand to fill those units.
  • Vacancies are flatlined at a steady 4%.
  • One trend we’re starting in San Diego is that occupancy is hovering right around 94-95%.
  • Lower vacancies are compelling people to stay in their apartments longer. The average resident stays for about 2 years.
  • Lower vacancies are also good for landlords. Renewal increases are strong at about 4-5% a year and when the tenant moves out, rents generally can be increased by about 10-15%. This is great, however, rent control may jeopardize many of these opportunities (more on this later).

San Diego Construction

San Diego Construction 2018

  • These numbers only reflect buildings that are actually being built. You may notice other sources indicate higher levels, however, those sources may factor in buildings that simply get a permit but never actually break ground.
  • Construction is picking up but it’s nowhere near enough to meet the growing demand.
  • Cost of lumber has gone up 20% since 2017 – this could mean higher construction costs.
  • Proposed tariffs could have an impact on developer’s proformas and smaller developers may feel the increases significantly.

Where They’re Building in San Diego

San Diego Heat Map Construction

  • About 25% of downtown’s inventory is currently under construction.
  • In Carmel Valley/Del Mar with One Paseo, about 10-12% of the current inventory is under construction.
  • Pockets of Mission Valley are seeing some construction with areas zoned for higher density residential.

 

San Diego Construction Cycle
San Diego Construction Cycle

  • One of the biggest trends that we have observed during the last cycle compared to this cycle is the change in floorplans.
  • San Diego is one of the largest metros in the US where floor plans have shrunk.
  • We’re building a lot more studios and one bedroom apartments. This is because developers can build and charge more for these units in areas like Little Italy, East Village, etc…
  • This could also mean rent per square foot is increasing and people are waiting longer to get married/start families so there’s less demand for larger spaces.

San Diego Rent Growth

San Diego Rent Growth

  • San Diego ended the second quarter of 2018 with year over year rent growth of 4.5%. Among major metros in the US, San Diego is in the top 10.
  • We’re into year 9 of rent expansion
  • The average rent in San Diego is approximately $1800.
  • CoStar anticipates positive rent growth over next few years.
  • This could be drastically different this time next year if Proposition 10 is passed on the November ballot. This would repeal the Costa-Hawkins Rental Housing Act and allow for cities to pass their own rent control ordinances. Don’t believe it’ll happen? In November, National City will be the first city in San Diego County to decide on rent control. This has the potential to harm landlords and renters.

San Diego Rent Control Lunch & Learn

San Diego Rent Control Class Gabhart Investments

I’ll be hosting an informative lunch and learn on Tuesday, September 18th, where you can learn more about Proposition 10 and the impact rent control may have on San Diego. This will have a strong emphasis on the san diego multifamily market, however, all property types will be discussed. I strongly encourage you to attend this informative event. Free lunch is provided to those who RSVP.

Sign Up Here

San Diego Annual Rent Growth by Submarket

  • Rent growth is the strongest in Point Loma at 10%.
  • Areas like East County, UTC and Downtown are seeing high rent growth.
  • The coastal markets are reaping the benefits of the increased demand during the summer months.
  • The San Diego rental market is seeing unprecedented rent growth and health.

san diego rent growth vs income growth

  • Incomes are not growing as fast as rents are growing, this is leading many San Diegan’s to downsize or share units.
  • This trend has continued for the past 7-8 years and probably will for many years to come.
  • Median renters household income is about $48,000
    • 42% of income is going towards rents
    • Downtown renters are paying 50% or more in some cases
  • Historically as rents continue to grow, people will look towards home ownership.
  • People are staying in their starter homes for about 9-10 years (up from the US average of 5-6 years)

San Diego Housing Crisis

San Diego Housing Growth

San Diego Single Family Housing Growth

  • Historically San Diego has been building more single-family residences (SFR) than multifamily units, however, these trends are starting to change. We’re actually building more apartments now.
    • this could be due to a lack of land or simply demand changes.
  • The San Diego Housing Commision estimates in the next decade based on population growth, we need about 175,000 additional units of supply.
    • This equates to roughly 17,000 units each year.
    • San Diego is FAR behind these numbers and is experiencing a housing crisis.
    • Roughly 3,000-3,500 multifamily units are being added each year.
    • Single-family permits are only averaging about 2,000 a year.
    • This places us about 12,000 or so units behind each year.

San Diego Capital Markets

san diego real estate sales volume

  • The San Diego multifamily market is having a really strong run as of late. Peak sales volume in 2017 was led by areas like Mission Valley which had $900 million in total sales volume. This is attributed to large deals like Pacific Ridge.

San Diego Sales Volume and Pricing

  • Last year we hit peak price at $270k a door and this year in the 1st half of 2018 we’re down to $255k. This isn’t a major cause for concern but should be something to watch for.
  • Newer construction on average is ranging between $400,000-450,000 a door with exceptions like The Dylan in Point Loma where prices were at about $500,000 a door.

san diego real estate quarterly sales volume

  • The total number of transaction is down 30% in the first half of 2018 compared to the first half of 2017
    • Fewer people chasing deals and banks looking at higher LTVs up to 50%
    • Institutional investors may be in hold periods
  • In the first half of 2018, we’ve only had 2 deals go over $100 million.

san diego cap rates by property type

  • Industrial properties are leading the way with the highest cap rates, followed by office, retail, and multifamily.
  • Along the coast, we’re seeing deals close at insanely low cap rates of 1.5-2.5%.
  • Many of the 5-5.5% cap rates in areas like National City, Chula Vista, La Mesa, North County, etc… are no longer around.
  • CoStar does not anticipate much cap rate expansion – maybe .3%
  • Our two favorite property types are multifamily and industrial. An ideal strategy may be for someone to move out of a lower cap rate multi-family property that could possibly fall under rent control in the future and move to a higher cap rate industrial building.

San Diego Demographics

San Diego Population Growth

  • People with graduate degrees are coming to San Diego. Our tech and life sciences industries have driven significant growth.
  • Those with a high school education are moving out due to a lack of wages that can meet the increased cost of living in San Diego.
  • Population growth has fallen below the national scale. This is due to San Diego’s transient town mentality where residents do not typically stay for more than a few years. The transient mentality can be attributed to several factors including the higher cost of living, decreasing housing stock, environmental factors, etc…
  • International migration has been the driver of our population growth. This can be attributed to factors like our growing life sciences and tech industries among other things.

San Diego Migration Statistics

  • Many San Diegan’s are beginning to migrate to more affordable markets like Phoenix, Texas, and the Inland Empire. From 2012-2016, 42,000 people migrated to the Inland Empire alone. If this trend continues, San Diego may lose out on a lot of talented workers.
  • Lack of job growth is leading some to pursue jobs in more thriving locations like the Bay Area.

San Diego delayed life changes demographics

  • Increasingly San Diegan’s are waiting longer to get married. From 2000-2015 the average age to get married went up by approximately 5 years.
  • This means the demand for more smaller units such as studios and one bedroom have increased and the demand for single-family homes has declined.

San Diego income growth

  • San Diegan’s income growth is lagging far behind the increased cost of living. We’ve only seen about 2-3% increases this cycle. If this trend continues, many working-class San Diegan’s could face financial hardships as they try to afford the increased cost of living.

San Diego Employment

San Diego employment

  • San Diego is currently above the national average for employment.
  • We hire about 20,000 workers year over year in San Diego.

Biggest Impact – Qualcomm

  • In April, Qualcomm laid off 1,300 employees. They gave back approximately 300,000 sq ft of office space.
  • The impact on the San Diego metro area is estimated at $5 billion. This accounts for 4% of the San Diego GDP.
  • For every job Qualcomm creates, another 2.5 jobs are added to the region on average.

Downtown San Diego Submarket

Downtown San Diego Submarket

  • 25% of downtown’s market is under construction.
  • No new supply in 2016 allowed for the increase in demand on newer constructions.
  • Downtown San Diego is one of the only places where vacancies are going up. This has to do with how
    many units are being built there compared to demand.
  • 60% of the units coming online this year in San Diego will be in Downtown.

Downtown San Diego Pipeline

Downtown San Diego Pipeline

  • The downtown market lacks a strong live, work, play environment. The lack of a Chargers stadium really hurt the area. Most buildings only consist of ground floor retail. There are very few places in San Diego where you can walk out of your 5-star class-A building and walk into a large homeless population (East Village is one of those places)
  • It remains to be seen how much demand will be driven to these units in the coming years.
  • As you can see, there is plenty of proposed buildings that may come online in the next decade. It will be interesting to see how this develops.

San Diego Trolley Expansion

San Diego trolley

  • San Diego is banking on the fact that people will start using the trolley with the expansion into the UTC area. There are approximately 112,000 riders a day but that number is only a small dent in the overall commuting population.
  • We are a largely suburban office campus market. People like their cars and there are very few places to get to without a car in San Diego.
  • It will be interesting to see what the trolley expansion will have on areas like Downtown San Diego.
  • The UTC stop has 2 million sq ft of office space within half a mile of it. This is great, however, the question becomes, “who’s going to want to walk half a mile in a suit in 90-degree heat”? Or what about those who simply have driven their whole life and don’t see the point in taking the trolley?
  • The trolley will be vital to continued development growth, but it remains to be seen if San Diegan’s will ever adopt it in large numbers.

** All graphics used in this article were provided by Josh Ohl, a Senior Analyst at CoStar. CoStar Group is the leading provider of commercial real estate information, analytics, and online marketplaces. They have been a tremendous tool for myself and countless other real estate professionals. Please visit their website and get in touch with your local representative today. **


Curtis Gabhart and Gabhart Investments, Inc – 2018 All Rights Reserved
The material contained in articles that appear on gabhartinvestments.com is not intended to provide legal, tax or other professional advice or to substitute for the proper professional advice and/or commercial real estate due diligence. We urge you to consult a licensed real estate broker, attorney, tax professional or other appropriate professionals before taking any action in regard to matters discussed in any article or posting. The posting of an article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

 

Hold vs Sell Decision – Real Estate Investing Class

Hold vs Sell Decision – Real Estate Investing Class

Hold vs Sell Decision

Commercial Real Estate Investing Class

One of the most important decisions for real estate investors is to hold an investment or sell it. This class will demonstrate a methodology to evaluate the hold vs. sell decision. Investment pro-forma’s will be used to measure the impact of keeping an investment or selling it.

Topics will include:

  • Estimating Investment Base
  • Forecasting cash flows
  • Comparing alternative investment strategies
  • Estimate investment performance with Net Present Value and IRR.

Registration is at $50.Seats are limited to 50! RSVP in advance to reserve your spot!

________________________________________

The presentation will be put on by Curtis Gabhart, CCIM and Mark Goldman, CCIM of SDSU. 

Curtis Gabhart has been a successful Real Estate professional for more than a decade. He has a Certified Commercial Investment Member (CCIM) designation from the CCIM Institute. He is a Director at Keller Williams Commercial Brokerage and President of Gabhart Investments, Inc, a privately held real estate investment firm that manages a syndication of private investors, specializing in acquiring and renovating single and multi-family properties. He also serves on the Commercial Advisory Board at the University of San Diego Burnham-Moores Center for Real Estate and he teaches commercial real estate courses for the California Association of REALTORS® and San Diego Association of REALTORS®. He has been recognized by members of Congress, California State Senators, the City of San Diego, and had a day named after him in the County of San Diego for his community service and dedication to the community. He was awarded as the Dealmaker of the Year for 2015 in Retail and Multi-Family category.

Mark Goldman has been a loan officer in San Diego since 1991. He has a degree in real estate finance from the University of Connecticut. Mark has a Certified Commercial Investment Member [CCIM] designation from the CCIM Institute. He has authored several books on real estate financial analysis and given seminars on real estate financial analysis and financial planning topics. Mark also teaches real estate finance at SDSU. His areas of expertise include analyzing financing alternatives and searching for specialized loan programs. Mark has been a “Certified Community Home Buyers’ Program” instructor. He can help to maximize your home purchasing power or achieve your refinancing goals.