SAN DIEGO-Competitive. That’s the best description for investor demand for core San Diego multifamily assets today. Although growth expectations are beginning to temper nationally, rent growth in the San Diego region is expected to pick up the pace over the next few years, at a rate of 3% to 5% annually through 2017. At the same time, vacancy is expected to be as low as 2% to 3% in strong submarkets, and averages less than 5% countywide. It’s a great time to be a multifamily investor in San Diego as the market continues to enjoy steady job growth, consistent low supply, and coveted demographics.
San Diego is home to a large population of millennials, nearly a quarter of the overall population, and is home to the fifth largest population of millennials in the country. San Diego also suffers – or benefits, depending on how you look at it—from continued supply constraints. Although there are 1,500-3,500 units coming online annually from now until 2017, this is a mere 1% to 2% of the total multifamily inventory. At the same time, there is increasing competition on the horizon from condominium developers.
As of September, San Diego’s median-priced single family home was $486,500, up 20% year over year, and a precursor to rising condominium prices. With an eye on cost-to-rent versus cost-to-own, many multifamily investors are fearful of cheap residential housing markets, but investors in San Diego do not share that concern. San Diego’s cost of living is 30% above the national average.
Investors will also be keeping a close eye on job growth. In San Diego, job growth is on the upswing, across a wide swath of sectors, and the multiplier is now in effect. The IT, tech and biotech fields, led by Qualcomm, are leading high paying white collar employment, which is spurring growth in the professional and business services sector (3% YOY) and administrative jobs (6% YOY). Manufacturing also continues to lead the charge with expansion at General Atomics and resulting service jobs. San Diego will continue to enjoy favorable trade winds with respect to job growth, with a projected average annual job growth of 31,000 over the next three years.
Low yields, largely due to increasing interest rates, are pushing some investors out of the multifamily market, but core-located product is still trading at a premium in San Diego. For apartment investors, this means continued low-interest-rate debt despite a rocky summer when borrowing rates jumped up 100-150 basis points. With the Federal Reserve’s quantitative easing program in place for now, many investors are capitalizing on agency debt, as well as life and bank lenders who have eagerly filled the gap in agency lending after regulators forced a 10% reduction in lending. Further diversity of multifamily lenders is expected to continue. Overall, borrowing rates have only slowed a select few investors, while most remain bullish on NOI growth in San Diego, mindful that NOIs must grow 10% to 15% to offset a 100 basis point spike in interest rates.
It continues to be a positive run for San Diego multifamily. Over the last few years, San Diego multifamily has been buoyed by exceptional demand drivers and strong multifamily fundamentals. The key to the market moving forward is discipline. The market will be inextricably tied to interest rates and public market metrics, and any upward movement in interest rates will need to be offset by corresponding rent growth. Investors will continue to select key opportunities and be disciplined in their approach, with a close eye on the capital markets.
Horizon Resources Inc
Horizon Resources Inc 