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.
- 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.
- 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.
- If you are interested in learning more on this issue, I will be hosting a rent control and vacation rental update lunch & learn on Tuesday, September 18th. I highly recommend you attend so you can get caught up to speed on the latest developments and what the impact could look like for property owners. Click here to RSVP
- 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
- 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
- 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
- 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.
- 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 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.
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.
- 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.
- 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
- 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
- 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.
- 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.
- 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.
- 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
- 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.
- 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.
- 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 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 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
- 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 howmany 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
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 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. **
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