WESTERN SNAPSHOT, JUNE 2008

San Diego Multifamily Market

Stability is the watchword in San Diego’s multifamily sector as second quarter 2008 progresses.

Apartment demand continues to benefit from the deteriorating housing market and tighter conditions for mortgage credit. Renters, who plan to become homeowners, are delaying their purchases, as some decide to wait in hopes of finding better bargains, while others have difficulty qualifying for loans. Consumers facing the tightening mortgage market are discovering that it is nearly impossible to get a loan today without income verification.

In spite of relatively higher demand for apartments, San Diego’s multifamily occupancy in the first quarter was approximately 95 percent, down 0.3 percent from the previous quarter and 0.8 percent from first quarter 2007. Rent for housing of 100 units or more averages $1,378, according to the most recent survey by RealFacts. This average rent represents a 0.6 percent increase from fourth quarter 2007 and a 3.7 percent increase from first quarter 2007.

A slight increase in vacancy rates is due to a shadow rental market, created by the homes and condominiums that have been pulled off the weak for-sale market and are being rented. But with only a small amount of construction going on, San Diego can be characterized as a stable market. The numbers remain healthy.

According to CoStar, San Diego has posted 12 transactions in the 25-units-or-more segment in first quarter 2008 for a total sales volume of $96.46 million. This makes for a fairly slow quarter, when compared with the 27 transactions that were completed in the last quarter of 2007 and the 22 deals in first quarter 2007. By comparison, fourth quarter’s total sales volume reached nearly $516 million, and first quarter 2007 posted a total sales volume of $424.1 million. On the other hand, average GRMs and cap rates — 10.52 and 5.8 percent, respectively — have shown very little movement from first quarter 2008 and year-end 2007.

The two largest multifamily sales in San Diego in first quarter 2008 were
a 147-unit property at 915 Brooktree Lane in Vista, which sold for $21.28 million ($144,762 per unit and $179.98 per square foot) at a cap rate of 4.70; and a 268-unit property at 4888 Logan Avenue in Bay Vista, which sold for $21.4 million ($79,851 per unit and $85.60 per square foot). 

Builders are concentrating on reducing inventory and not adding to the excessive supply of housing units. The San Diego Union Tribune reported a sharp decline in construction. Near-record low numbers of construction permits have been issued in 2008, with only 185 single-family and eight multifamily permits issued in March. (These figures exclude multifamily projects and homes currently under construction or planned for the future.) The top five metro San Diego submarkets for development are, in order of importance: downtown San Diego, the North Beaches, La Jolla/University Towne Center, Vista and Miramesa. Slower areas for development include Ocean Beach and Point Loma, followed by the area of San Diego located east of the Interstate 15 freeway, Escondido and San Marcos, La Mesa and Oceanside.

Bosa Development is underway on Bayside at the Embarcadero, a 36-story, 241-unit condominium tower at the southeast corner of Pacific Highway and Ash Street in downtown San Diego. Construction began in November 2006 with completions targeted for summer 2009. Pointe of View Developments is developing Vantage Pointe, a 40-story, residential and retail project comprising 679 condo units and approximately 25,000 square feet of retail space located in the Core District of San Diego near the terminus of the 163 Freeway. Construction began in July 2004, and completion is targeted for October.

The San Diego multifamily market will see the number of transactions and the volume of sales picking up in second quarter. A significant new trend is emerging among investors in commercial real estate who are now looking to enter the multifamily investment market. Owners of office, retail and industrial properties, who are feeling the effects of the downturn, are deciding to diversify.

Based in San Diego, Rita Lancaster-Hannah is a senior vice president with Coldwell Banker Commercial Almar Group and a specialist in multifamily and investment sales.

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