Featured Article: San Diego’s Inherent Advantages Win Over Investors

‍‍Other western cities like Phoenix, Salt Lake City, Denver, and Las Vegas may be the beneficiaries of California trans-plants — many of whom left during the pandemic in search of more space and cheaper prices — but they can’t offer what San Diego has. Namely, near-perfect weather, a plethora of outdoor activities, and a diverse job market that can accommodate most skill sets.

This has kept the market steady, despite the pandemic. It has also kept residents coming, despite the rising prices. “The San Diego multifamily market has continued to be extremely strong, and we are seeing an influx of new residents that are outpacing housing supply,” says David Shin, vice president of asset management at Interstate Equities Corp. “In 2021, the multifamily vacancy rate was just 2.9 percent, the lowest recorded vacancy rate in San Diego in more than 20 years.” Average rent in San Diego County crossed the $2,000 mark — settling at $2,009 in the second quarter of 2021, according to CoStar Group. This was an 8.4 percent increase year-over-year. It was also the county’s biggest leap since 2001.

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Attractive Market for All

Those who move to San Diego for the lifestyle aren’t scared off by these high rents, and it shows.

The 103-unit Secoya micro-apartment community in Bankers Hill is the first project to utilize San Diego’s Complete Communities ordinance, doubling the maximum permissible density and reducing permit fees. The parking requirement was also waived as Secoya sits along a major transit line.

“For renters, location is essential,” Shin continues. “San Diego continues to see a flood of new residents due to the benefits offered by its geographical location, such as great weather and being close to the beach. In addition to location, many renters prefer modern, new, or recently upgraded properties and are willing to pay an additional cost to live in these quality communities.” on the higher end — who comprise a significant chunk of the market -are willing to pay between $2.50 and $3.50 per square foot.

“The typical renter in San Diego today will take what he or she can get,” he says. “High occupancy rates and routinely rising rents, along with an endless supply of capital, have created a long-term demand for rental housing.”This demand isn’t likely to drop anytime soon, experts say. The lifestyle is still coveted, and San Diego’s geographic barriers with CampPendleton to the north, the desert to the east, Mexico to the south, and the Pacific Ocean to the west make this a constrained market.

“San Diego’s economic fundamentals are strong, but the land is scarce,” notes Gilman Bishop, principal of real estate development firm Bishop Ventures.

“I see San Diego’s rental market continuing to steadily increase for the next five years. Vacancy for well-managed prop- parties will continue to be around 2.5 to 3 percent.” The land is scarcest in the beach cities. Downtown’s significant employment sector, coupled with a keen selection of dining, entertainment, nightlife, sporting, and outdoor amenities, has made this the hot spot for today’s multifamily developers.Alan Nevin, director of economic research at Xpera Group, a strategic consulting group for the built environment, notes multifamily rent-

Nevin notes there are currently, about 3,000 units are under construction downtown in eight projects. This includes Pinnacle International’s 618-unit 11th & Broadway, the largest development in East Village, which is scheduled for completion in late 2022, as well

As proof that San Diego is a market with legs, Cisterra’s been developing here for 20 years. Its first project was Diamond View Tower.

“It was an office building, and almost every other developer in the market was building residential,” recalls Jason Wood, principal at Cisterra Development. “The pipeline back then for residential projects surpassed historical absorption rates, but the market accelerated its absorption and that pace continued, even in the down years. The pandemic was a speed bump on that trend, and it looks like the future will be bright for the market.”

It may be even brighter, Wood notes, if downtown lands a massive life sciences or tech company. It’s certainly building the facilities for it, including the Campus at Horton, IQHQ’s Research and Development District (RaDD), and 1155 Island.

“The one factor that could impact the five-year outlook is if downtown San Diego successfully secures a large technology or life sciences, tenant,” he continues. There are a few projects underway that are geared toward these tenants, but no leasing commitments yet. If a lease is completed and that brings several thousand very high-paying jobs to downtown, rents for newer, higher-end apartment units could see another spike.”

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As proof that San Diego is a market with legs, Cisterra’s been developing here for 20 years. Its first project was DiamondView Tower.

“It was an office building, and almost every other developer in the market was building residential,” recalls Jason Wood, principal at Cisterra Development. “The pipeline back then for residential projects surpassed historical absorption rates, but the market accelerated its absorption and that pace continued, even in the down years. The pandemic was a speed bump on that trend, and it looks like the future will be bright for the market.”

It may be even brighter, Wood notes, if downtown lands a massive life sciences or tech company. It’s certainly building the facilities for it, including the Campus at Horton, IQHQ’s Research and Development District (RaDD), and 1155 Island.

“The one factor that could impact the five-year outlook is downtown San Diego successfully secures a large technology or life sciences, tenant,” he continues. There are a few projects underway that are geared toward these tenants, but no leasing commitments yet. If a lease is completed and that brings several thousand very high-paying jobs to downtown, rents for newer, higher-end apartment units could see another spike.''

Affordability Issue Not Going Away

Despite all these efforts, Bishop believes the county and its multifamily developers and investors have a long way to go when it comes to providing affordable housing.

“It’s going to get a lot worse before it gets better,” he says. “We’re not building any moderate-income housing in San Diego. We are going to have to take drastic action at a regional level to double, if not triple, our annual housing production to affect real change. Until we figure out how to dramatically increase annual production, San Di- ego is going to continue to become less affordable every year.”

Yes, the county’s popularity seems to be a double-edged sword. There are plenty of people willing to pay top dollar for apartments with top locations, amenities, and conveniences. There are also plenty of investors and developers willing to build them. This won’t likely slow down anytime soon, despite the current construction pipeline and broader concerns. After all, the lifestyle isn’t going anywhere.

“Developers have been contending with price escalations and labor shortages for several years, and these issues have only been exacerbated by the pandemic,” Miramontes explains. “These issues, in turn, affect land value, the cost of capital, and overall development costs. There are overarching concerns within the multifamily investment arena about inflation, interest rates rising, and property performance. However, San Diego remains a very desirable place to live, with an excellent employment base and, in turn, is an at- tractive multifamily investment market.”

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