Source: Costar, September, 2020Even with the Covid-19 turmoil, apartment vacancy in San Diego is not expected to exceed 6%. In our interviews with apartment managers, they indicate that vacancy and turn over issues are specific to the market area and property, with the coastal areas experiencing minimal if any impact. The brokerage and lending communities are still adjusting and adapting to the rent control measure that took effect in January of 2020 that limits annual rent increases to 5% plus local inflation (7.2% for San Diego in 2020). Most apartment sales marketing flyers and offering documents still look to rents on turnover. While apartment appraisers now must look to upward trended rents and estimate that probable turnover rates for apartment properties. Apartment construction costs in San Diego County have been ranging from $270.00 to $300.00 per square foot for replacement costs, which means higher apartment insurance premiums or risking being under-insured should anything happen to your property. Apartment management fees are still ranging from 7% to 8% for most properties. Apartment management fees have not rolled back despite the substantial rental increases over the past few years.
According to the San Diego Union-Tribune, Costar is predicting a 10% decline in apartment rents in San Diego by the end of 2020 in light of the Covid-19 pandemic. Link to recent apartment article: Union-Tribune Apartment Article
The Southern California Rental Housing Association released its apartment rent and vacancy survey this past month. The publication reported that the City of San Diego apartment vacancy rate was at 4.3%, which is up from the same time in 2018, when the rate was 2.9%. It should be noted that apartment vacancy rates are seasonal tend to be lower in the spring and higher going into the fall. The average City of San Diego one-bedroom apartment rents were reported at $1,292, two-bedroom units at $1,850, and three-bedroom units at $2,407 per month. The report noted that apartment occupancy was more evenly distributed county wide relative to the past, as all apartment property owners are benefitting from this period of very strong demand and limited market inventory.
There has been very significant upward pressure on apartment rents throughout San Diego County through 2018. San Diego Apartment rental rates have increased approximately 6%, per year on a compounded basis. Month-to-month apartment tenants typically pay rents that are approximately 10% higher than a tenant that commits to a full year lease. Apartment managers have commenced very high tenant screening standards, are requiring higher deposits, proof of apartment insurance, annual walk-through inspections, and stricter lease terms. The high cost of residing in San Diego has caused an increase in out-migration of some residents. However, the demand for rentals still far exceeds the supply.
According to Marcus and Millichap, developers are underway with 7,800 apartments with delivery dates extending into 2021. More than 40 percent of this pipeline will be finalized in the next three quarters. Most of these new multi-family projects are high end and near the urban core.
Current 2014 population estimates published by the Department of Finance are available at the link below, for all municipalities in the State of California including San Diego, Imperial, Riverside, and Orange County. Current California Population Data By City: CAPopulation.xlsThis report provides revised population estimates as of January 1, 2013 and provisional population estimates as of January 1, 2014 for the state, counties, and cities and includes a calculation of annual percent change. These population estimates incorporate 2010 census counts. The methodology for the City and Unincorporated Area Estimates is based on housing units. The HUM is used to estimate total and occupied housing units, household size, household population, and group quarters population. Housing units are estimated by adding new construction and annexations and subtracting demolitions, and adjusting for units lost or gained by conversions. Annual housing unit change data are supplied by local jurisdictions and the U.S. Census Bureau. Occupied housing units are estimated by applying a derived civilian vacancy rate, based on 2010 benchmark data, to the estimated civilian housing units. Adjustments to census vacancy rates are made periodically. Exact data on foreclosures or other housing market indicators are not available to adjust vacancy rates. Military occupied housing units are added to civilian occupied housing units to calculate total occupied housing units. Military surveys are used to track military changes including base realignments and closures. Household population estimates are derived by multiplying the number of occupied housing units by the current persons per household. The persons per household estimates are based on 2010 census benchmark data and are adjusted by raking the current county population series into these estimates. The group quarters population is based on the Census Bureau’s 2010 SF1 File counts on group quarters and annually adjusted using reported changes for group quarters by state, federal, and local agencies. The household and group quarters populations are summed to produce the initial city population estimates. These estimates are aligned to the county estimates described below.Source: State of California, Department of Finance, E-1 Population Estimates for Cities, Counties and the State with Annual Percent Change — January 1, 2013 and 2014. Sacramento, California, May 2014.
The State of California has projected the following growth rates for San Diego County:
• Total employment is expected to increase by an average rate of 1.9 percent per year over the next five years. • Average salaries in San Diego are well above the California state average, and will remain so over the foreseeable future. Real average salaries are expected to rise by an average of 1.1 percent per year. • The fastest rates of growth will be observed in information and professional and business services. These sectors will increase by annual average rates of 3.8 percent and 2.9 percent, respectively. • Population growth is expected to accelerate, reaching 1.2 percent by 2017. Annual growth is expected to average 1.1 percent from 2014 to 2018. • From 2014 to 2018, an average of 9,600 net migrants will enter the San Diego county each year. This represents a dramatic increase over the previous five years, in which total net migration was virtually flat. • Real per capita income in San Diego is expected to increase by an annual compound rate of 2.4 percent. • Total taxable sales are expected to increase by an average of 2.5 percent. • Industrial production is expected average of 3.8 percent per year from 2014 to 2018.
Source: California Department of Transportation
The retail commercial real estate market is showing consistent improvement. We are seeing reduced vacancy, upward pressure on rents, and higher prices per square foot being paid along major commercial streets in the Spring of 2014. The most recent graphs from Voit Commercial illustrate the gradually improving market conditions throughout San Diego. We are also seeing significant downward pressure on the capitalization rates of triple net leased investments. Capitalization rates for fast food restaurants are currently under 5% for well located national chains in San Diego County.
The San Diego Multiple Listing Real Estate Data Service, SANDICOR, has successfully launched its new system Paragon this week. Paragon was designed to be mobile friendly, work on all kinds of devices and browsers, allow for multiple searches at one time, the uploading and display of slide shows, and new tools that allow appraisers to analyze data in greater detail. The new MLS system includes embedded training videos and they will do training sessions at larger real estate sales and appraisal offices on request. My appraisal office started using and testing the system when they rolled it out as a transitional system. Paragon has worked very well on our new computer systems using multiple browsers and is a major improvement over the prior MLS real estate data portal in terms of the new search tools and speed. Congratulations and our thanks to SANDICOR for such a successful and well planned launch.
Cassidy Turley Commercial Brokerage has released its San Diego 2014 Commercial Real Estate Forecast publication. This real estate market forecast discusses industrial, office, retail, apartment, hotel, and investment market trends for San Diego County. The report goes into detail about vacancy rates, absorption, and commercial rental rates. Because the report includes year end statistics, compiled from many sources, this publication is typically released in the Spring. Their Research Department always does an excellent job and this publication is constantly improving. Below is a synopsis from this report and a link to the complete report.
Commercial Real Estate Market Forecast Synopsis
Office: In 2014, the negotiating power between landlords and tenants in the Class A central core submarkets is expected to shift further supported by strengthening leasing fundamentals and moderate new construction. Countywide office vacancy is forecasted to decline 40 bps to 14.3% by the end of 2014 and Class A vacancy is expected to drop below the pre-recession level of 11.7%.
Industrial: The industrial market continued its growth in 2013 with its 10 consecutive quarters of positive net absorption. Until new speculative construction returns, the steady absorption of existing available inventory will continue to drive vacancy rates lower. The countywide direct vacancy rate is forecasted to decrease by 120 basis points to 5.9% by the end of 2014 and fall below the pre-recession level.
Retail: Continued pressure on asking rents and competitive concessions offered by landlords will support positive leasing activity in 2014 resulting in a moderate decrease in the countywide total vacancy rate from 4.5% in 2013 to 4.3% in 2014. The recovery is underway, albeit sluggish, and is much more evident in the prime coastal submarkets compared to the rest of the county. Retailers will continue to compete for the most visible locations, investors will continue upgrading existing properties, and new ground-up construction projects have begun.
Investment: The San Diego commercial real estate investment market transaction volume reached $5.1 billion in 2013, marking the 4 consecutive year-over-year gain in volume, a trend that is expected to continue in 2014. The Federal Reserve Committee’s reassurance of a highly accommodative stance of monetary policy, an increased availability of capital and easing lender standards will positively support the investment environment. Demand for top products in secondary markets including San Diego will remain strong, but will be met with a shortage of large scale offerings.
Multi-Family: Development activity has heated up, making the multi-family sector the first to fully recover and begin sustainable expansion. Fueled by pent up demand and historically low interest rate financing, investment activity in this sector is forecasted to remain fierce. With household formation and employment poised for moderate improvement, San Diego should expect to see vacancy dip to 2.5% and rental rates rise slightly by the end of 2014.
Overall, we expect 2014 to be a stable year for San Diego’s commercial real estate market. San Diego will increasingly be a relatively attractive market for investors to place their money in 2014. There will be attractive leasing opportunities for tenants/users that do not need to be in large Class A projects in the core markets.