WESTERN SNAPSHOT, MARCH 2011

San Diego Multifamily Market

The flight to quality assets continues with local investors and REITS actively pursuing top-tier multifamily assets in San Diego. Private investors are expected to become more active as they adjust their yield expectations to take into account the lack of distressed sales. Across the board, however, investors are beginning to consider Class B and Class C properties in less-favored areas of San Diego County because competition remains stiff for premium assets.

One of last year’s largest multifamily sales nationally occurred in San Diego when Equity Residential, a Chicago-based REIT, purchased the 40-story Vantage Point Tower from Pointe of View Condominiums for $200 million in third quarter. Another REIT, AvalonBay Communities, acquired the 450-unit Waterstone Carlsbad apartments from PPC Cascade LLC for $78.1 million in early February. Other notable sales were the 128-unit Canyon Hills and 132-unit Flowers Fields selling for a combined $66 million to Laguna Niguel, Calif.-based Raintree Partners.

The strongest performing submarkets in San Diego County are the La Jolla/University City submarket and the Northwest County submarket, which have occupancy rates of 97.3 percent and 96.5 percent, respectively, according to MPF Research. The La Jolla/University City submarket experienced a 2.5 percent rent increase in third quarter 2010 from the year prior and the Northwest County submarket experienced rent increases of 1.6 percent.

The other San Diego County submarkets did not experience rent increases above a half percent in 2010. Even the slowest San Diego areas are faring better than many major U.S. markets, as the lowest occupancy rate posted in San Diego in third quarter 2010 was 94.4 percent while some major U.S. markets have experienced double-digit vacancies. Average rents in San Diego, as of third quarter 2010, were $1,381, up by 0.4 percent from $1,376 during the same period a year earlier, according to RealFacts LLC.

Flush from a joint venture for a co-investment fund it completed with CB Richard Ellis Investors in mid-December, Atlanta-based private real estate company Wood Partners is among the half dozen developers with apartment projects in the pipeline in San Diego for 2011. Wood Partners has already broken ground on a 379-unit apartment community in Kearny Mesa.

Developer’s interest in building in San Diego stems partly from the fact that net absorption of local apartments was positive in San Diego County for each of the past 5 quarters. Unlike other areas of the country, San Diego does not have a large unsold shadow market of condominiums or houses competing for renters, and home prices have remained high enough that a gap remains between rental rates and home prices.

Demand for apartments is expected to rise to 3,000 units by first quarter 2011, lowering vacancy to 3.1 percent and supporting a 3.8 percent increase in rental rates, according to MPF Research.

With a rapid tightening and little prospect for new supply, some expect a return to boom-level conditions in the San Diego market. Yet, just as the recession brought only a modest increase in vacancy and decrease in rents to San Diego apartments, the view here supports Reis’ predictions that a recovery will be modest. Landlords can expect to see low vacancy and moderate rent gains.

Supply constraints resulting from the difficulty of finding development sites west of the mountains in coastal San Diego, combined with strong demand as the economy continues to recover, should bode well for the apartment market and will be attractive to investors, as the small pool of apartments listings will fall short of demand.

— Rita Lancaster-Hannah and Andrew Luce are senior vice president and vice president, respectively, in the San Diego (UTC-La Jolla) office of Coldwell Banker Commercial Almar Real Estate Group.

©2011 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.