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.

 

San Diego Multi-Family Deal Maker Of The Year Winner

San Diego Multi-Family Deal Maker Of The Year Winner

Winner of the San Diego Business Journal Top Real Estate Deals of 2014

“My team represented the owner and closed the deal from multiple offers, at the full asking price of $4.7 million. That selling point was one of the highest recorded price-per-unit sales in Golden Hill.”

I was honored and humbled when I recently won the prestigious San Diego Business Journals Deal Maker of the Year Award for best Multi-Family with the sale of El Dorado Manor in Golden Hill and also won for the top Retail Deal of the Year for the sale of the San Ysidro Swap Meet.

I wanted to take few moments to share with you the details of the apartment transaction in hopes that it will provide you with some ideas for transactions you may be involved in.  The deal presented was the successful sale of a 22 unit multi-family property located just east of downtown San Diego in the Golden Hill neighborhood. My team represented the owner and closed the deal from multiple offers, at the full asking price of $4.7 million. That selling point was one of the highest recorded price-per-unit sales in Golden Hill.     

This story began in 2005 when I originally teamed up with the Seller for a project to put a subdivision tract map on the property.  The Seller’s original plan was to either develop the property himself or sell it as a package to a condo conversion specialist. That plan was dealt a challenge when the City of San Diego was served with a lawsuit by a private group whose aim was to stop Condo Conversion projects.

2404-c-street-001_web

Front shot of the 22 unit golden hill apartment building for sale

With over 180 projects across the city paralyzed by pending litigation, I swiftly assembled the team necessary to start a non-profit 2014-07-10_21-35-13foundation providing legal leadership to all the affected property owners.  The Foundation’s actions soon gathered many of the Owners together and successfully removed them from the lawsuit.  However, the larger issue was a lack of defined and realistic civic regulation covering this type of real estate transaction.

EL Dorado logo

logo that was created as part of the marketing campaign

I employed the resources of the foundation to continue its mission beyond this first success. The involvement of all parties – City, Owners, Realtors, and Citizens – was the key to the creation of new condominium conversion regulations for the City of San Diego.  My continued involvement in the lawsuit conversations and its successful resolution meant that condominium conversion would continue to be one of many sources of affordable home ownership for San Diegans.

Unfortunately, the delays encountered in addressing the lawsuit prevented the owner of the Golden Hill property from selling at the most opportune time, at the peak of the market for this property type.  Not to be dissuaded, I continued to meet regularly over the years with the Owner, analyzing market trends and data. Incorporated into this strategy was attention to the existing tentative condominium map so that it did not lose value through expiration.

Golden Hill Apartment SummaryIn 2012 and 2013 the meetings included a new, thorough financial analysis. The Owner and I focused on three viable scenarios for the property:

  • Owner to proceed with the Condominium Conversion himself
  • Owner and Agent (Myself) to enter into a joint venture to complete the Condominium Conversion
  • Owner to sell the property as it existed (multi-family apartments).

Additionally, my research addressed these issues:

  • Tax basis and tax consequences for the Owner
  • The potential tax liabilities of the Owner doing the Conversion directly
  • The value of the property in a 1031 exchange as  condominiums or as apartments

After 10 + years of ownership, trading out this property in the Owner’s portfolio would require a very attractive replacement and the confidence that I would be able to locate it.  Our carefully considered conclusion was to list the property as an apartment building with the still-viable tentative condominium map included in the transaction.

With the Owner’s blessing, I selected an ambitious price point, which was the highest per unit price of any listing in Golden Hill.  This created a fresh challenge – overcoming resistance to the number by clearly illustrating the supporting values.

Through my research of current and historic rents in the desirable neighborhood, I revealed support for aggressive pricing, indicating viable prospects for the property.  A detailed list and photographs of comparable buildings in the area was compiled to show buyers what was being offered to apartment seekers at that price point.  Additionally, I invested in large-scale, photo-realistic renderings of the 2404-c-street-039_webproperty, illustrating its potential for renovation as a condominium project able to compete with pricier options in nearby Downtown San Diego. Packaged into a video format, the information was easily communicated to potential Buyers and their Realtors. This action enlarged the pool of potential buyers, with more agents and clients able to understand in visual terms the scope of possibilities and value being presented.

C Street Rendering

a rendering that was made for the marketing of the apartment building

 

The historic high price point per unit was supported and accepted, evidenced by the reception of multiple offers on the property.  My persistence throughout a 10-year relationship and innovation created value and resulted in a successful transaction at full asking price for the Seller. My understanding of all facets of the transaction was invaluable in assisting the Buyer’s agent in compilation of the multitude of documents into a comprehensible format for the Buyer.

A final level of complexity had to be negotiated. The transaction needed to be completed within a specific one-week window of opportunity.  The ability to do this in coordination with the Buyer’s Broker allowed the Buyer to fulfill the requirements of their 1031 exchange at the same time the Seller did the same for their 1031 transaction. Additionally the sale was carefully timed so that the Seller avoided a significant pre-payment penalty.

Follow the link for the full marketing package https://gii.box.com/goldenhillapartmentforsale

Link to property website www.2404cstreet.com

Stay tuned for our case study of The San Ysidro Swap Meet which we won Deal Maker of the Year for.

JOBS Act…Plan for it

For those of you who haven’t been following the JOBS Act, it is a bill that will make it easier for startups and small businesses to raise funds, especially through online crowdfunding, is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.

 

The JOBS act was designed to help small businesses by:

 

1. Removing general solicitation and advertising restrictions for certain private offerings

 

  • Rule 506 – If all purchasers are accredited investors
  • Rule 144A – If issuer reasonably believed all purchasers are qualified institutional buyers

2. Creating a new $1M crowdfunding exemption, allowing non-accredited investors to participate in the funding rounds

  • Up to $1M of securities in a 12-month period
  • Investor’s net worth <$100k they can purchase greater of $2k or 5% of annual income or net worth
  • Investor’s net worth $100k+ they can purchase 10% of annual income or net worth up to $100k

Complete article

The SEC will have a 270 days to implement additional regulations from signing of the bill.

If you are a real estate investor who may be looking to raise private capital through this vehicle you may want to start planning in the meantime.

Planning is the foundation to your success, Execution is the material that creates the business. Execution without planning is like wanting to drive to Fargo without a map. You may end up getting there but a little planning could have saved you a lot of time.

  • Check out my previous blog post where I lay out business planning and goal setting:

http://gabhartinvestments.com/article/in-the-office-today-working-on-my-2010-real-estate-business-plan/

  • Get all the documents in place. Including your business plan, incorporation documents , financial analysis & forecasts and a full executive team bio.
  • Do market research. Get all the facts in place in order to have a strong argument as to why people should fund your project.
  • Start putting together a list of contacts and potential investors.
  • The concept of crowd funding involves work from the user seeking funds as they need to leverage their networks and ask their networks to lend a hand. We found that the initial 30-40% of activity actually comes from the users’ network.
  • Make a video
  • Start to craft your pitch in the best possible way. If someone asks what you do can you explain it in 30 seconds or less? Do you know what your most common questions are and the answers to those questions?
  • Start building your social network presence. Remember crowd sourcing is based on smaller amounts of money from multiple people. Start building your network and credibility

Time will tell exactly how much impact the JOBS Act will have on the job market and raising money for Real Estate

Some reasons it may not make sense:

IF the SEC:

  • Makes it to costly to set up
  • Makes it to complicated to create
  • Has to be sold through securities brokers

OR

  • It may be to cumbersome to have a lot of little investors on deals.
  • More red tape and reporting requirements

I am not sure yet whether this is a good thing or not. It really depends on the SEC final terms which I will report on when the grace period is over.

 

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HARP2 saving small % of underwater mortgages

The HARP2 program, combined with the $25B bank settlement (providing $20B in loan modifications), will save some underwater mortgages from foreclosure and help long-term market stabilization. However, part of the bank settlement requires banks to adopt standardized (and hopefully more efficient) servicing and foreclosure processing measures. I think better processing, combined with the sheer volume of underwater mortgages is going to keep the short sale floodgates open for quite some time.

According to researchers at CoreLogic, a leading analytics firm, 11.1 million or 22.8 percent of all residential properties in the United States were worth less than the amount their homeowners owed on the mortgages used to purchase them.

The federal government originally rolled out the HARP program in 2009 to help homeowners who were underwater or near underwater. However, the program was recently broadened to reach even more borrowers. Originally, HARP applied to 895,000 underwater borrowers; and now HARP II is expected to help up to double that amount. According to HUD, about 400,000 homeowners have taken advantage of the program since it launched in April 2012…that’s less than 4% of underwater mortgages.

HARP II allows underwater homeowners who are continuing to make payments to refinance their loan. The new program offers a number of advantages over the original HARP loans. First off, there is no loan-to-value or combined loan-to-value restriction on fixed-rate loans with terms of 30 years and under. In other words, it doesn’t matter how upside-down borrowers are on their mortgages. Previously, there was a cap that restricted borrowers who owed more than 125 percent of their home’s current worth from accessing the program. In addition, an appraisal may be waived if a value for the home can be automatically generated, and the borrower only needs to have a 620 FICO score.

There are three main components to qualifying for a HARP II refinance loan. The first requirement is that the loan must be owned by either Fannie Mae or Freddie Mac. Second, the loan must have been sold to Fannie or Freddie before June 1, 2009. Third, a HARP II refinance must benefit borrowers in at least one of four ways:

  • Reduce the loan’s monthly principal and interest payment.
  • Reduce the loan’s interest rate.
  • Reduce the loan’s amortization term.
  • Transition the loan to a more stable type of loan. (i.e. interest-only to fully-amortizing, adjustable-rate to fixed-rate, 30-year to 15-year).

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