The San Diego apartment market is stronger than most southern California apartment metros in today’s challenging market. While the Inland Empire (San Bernardino and Riverside apartment markets) licks its wounds, and when the Los Angeles apartment market is still trying to find stabilization, San Diego’s maintains a strong demand/supply check. Over the past several years the supply of new apartments constructed has averaged a little over 1,350 units per year. The year of 2008 saw 910 new units added to the supply, while 2009 is expected to add another 430 units. This slow down in building inventory, coupled with the fact that approximately 13,000 units were converted to condos during the last 7 years, is good news for apartment owners and investment of multi-family units. Further, the 2010 year is expected to be a slow year for supply.
Vacancy in San Diego boasts a strong 3-4% rate, relatively low compared to the neighboring counties of San Bernardino, Riverside, Orange County and Los Angeles. This range boasts well for the investment of apartments in San Diego. This high occupancy is due in part by its diverse employment base, particularly the health care and education sectors. Another factor keeping the occupancy high is the unemployment rate of 10.1% is below the 11.6% rate for the State of California. Not bad, considering it is the third largest county in the state. However, with the softness expected to continue most apartment brokers and owners are suggesting a 5% vacancy rate by year end.
Rents countywide are down slightly – 2% on average, but most of this downward pressure is coming from the Class A apartment buildings. Most landlords and management companies are reporting stable rents in the Class B and C categories. We expect the same, with a slight uptick, by the end of the year.
Cap rates are rising. Sellers desire the values seen in 2006-2008, but reality is setting in. There are deals being done in the 6-6.5% range, but this is only for first rate properties. Most of the transactions are trading in the 6.5-7% range, with some inventory heavy submarkets like El Cajon, Chula Vista, and City Heights trading even higher. The problem: there is still a disconnect between buyers and sellers. With the wave of commercial REO’s that are set to hit over the next two years this will bring reality to the market. We expect multi-family / apartment properties to have an adjustment upwards of 50-100 basis points when the expected apartment REO’s hit the market.
By Michael Duhs, Managing Broker of East West Commercial http://www.EastWestCommercial.com , a brokerage company specializing in apartment, senior housing, and triple net transactions throughout southern California. Michael can be reached at (949) 939-8352.
Sources: San Diego Union, SANDAG, U.S. Labor Statistics, Marcus & Millichap
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