Rents should edge higher metro-wide in contrast to average effective rents throughout the country, which are on pace to contract 3 percent. Asking rents in San Diego are expected to reach $1,308 per month in 2010, a 0.2 percent gain, while effective rents will inch up 0.1 percent to $1,250 per month. Meanwhile, vacancy levels in the city started 2010 amongst the lowest in the country. The vacancy rate is forecast to tick up 20 basis points and end the year at 5.4 percent, approximately 250 basis points below the national average.
Fast Facts: San Diego
Population: 3.048 million
Median Age: 34.7
Median Household Income: $60,101
Unemployment: 10.6%
Vacancy Rate: 4.9%
Effective Rent: $1,249
Notable: San Diego is the site of one of the country’s largest naval fleets and has the largest concentration of naval facilities in the world. In addition, the city is known for housing one of the world’s largest zoos with more than 4,000 animals.
Sources: Marcus & Millichap, Reis, Economy.com, AGS
Demand for units should persist, even as new development picks up this year. Builders are scheduled to complete 1,100 units this year, a 0.6 percent increase to inventory, following the delivery of 541 apartments in 2009. The multifamily component of the Grossmont Trolley Station development is one of the largest apartment projects in the metro. Together, the Pravada and Alterra complexes in La Mesa will add 447 market-rate units to local inventory.
Another large project coming online this year is in the Escondido/San Marcos submarket. In late 2009, the San Marcos City Council approved a plan for a mixed-use development to include between 800 and 1,000 student housing units, retail space, and three office parks. The project is expected to come online in phases starting in 2010.
Sales Stabilize
With property performance expected to steady throughout much of the metro, investment activity will also likely pick up this year. Buyer and seller expectations became more closely aligned throughout 2009, particularly for stabilized properties with fewer than 40 units. The median price per unit in deals closed during the past six months is $109,900 after peaking at nearly $140,000 per unit in 2005.
Cap rates rose more than 100 basis points last year to an average of approximately 6.5 percent metro-wide. Despite that, a few six- and eight-unit properties sold with cap rates below 6 percent, while some lesser assets changed hands in the mid- to high-7 percent range. Cap rates could tick higher in 2010, but increases similar to those recorded in 2009 are unlikely.
Unlike the rest of the country, distress and REO deals have been limited in the market, with far fewer of these deals closing than was originally anticipated by many buyers. Lenders continue to try to work with owners, and property fundamentals in many cases remain strong, which will likely limit distress sales this year.
Neighborhood Watch
While vacancy is expected to tick slightly higher in 2010, the rise will be minimal and concentrated in the downtown submarket. A glut of condos came online in the area just as the local housing market began to decline, and many of these units have now converted to rentals.
Supply-side pressure downtown will increase further as 400 apartments and 200 new condo units are completed this year in the submarket. As a result, the current vacancy rate of 6.9 percent, the highest in the metro, will edge higher in 2010 and is expected to nearly double to the 12 percent range by year’s end.
Meanwhile, vacancy levels in all other metro submarkets should remain relatively flat. The submarkets with the lowest vacancy rates today are Mission Bay/Pacific Beach (3.3 percent); Balboa Park/West of I-15 (3.7 percent); National City/Chula Vista (4.1 percent); and El Cajon/Santee/Lakeside (4.1 percent). In each of these submarkets, minimal or no new units were delivered in 2009, which helped keep conditions tight.
Overall, San Diego is poised to have a solid 2010, as its metrics remain stable and surpass the rest of the nation in most cases.