MARKET SNAPSHOT: San Diego Could See Apartment Shortage by 2012

San Diego—San Diego County is likely to face a shortage of apartments by August 2012, reports Jack Nooren, vice president at NAI San Diego.

Vacancy in the third quarter of 2010 was reported at 4.5 percent, with no additional completions. Yet the county has experienced a 1.2 percent population growth throughout 2010, with about half of these new people expected to seek rentals.

Nooren predicts that San Diego County has a need for 9,363 new units per year; there are currently 1,848 units in the pipeline, according to Pierce-Eislen.

Meanwhile, rents increased 1.4 percent in the third quarter of 2010. “Based on a modest rent increase of 1.4 percent to 1.5 percent in the fourth quarter, I anticipate that we’ll see a much greater rent increase coming up over the next one-and-a-half years,” Nooren tells MHN. “I forecast that to be between 5 percent and 6 percent and that we will be returning to the height of the market [of 2006], based on the shortage of units, within four years.”

Most investors seem to be interested in the coastal areas, which also have lower cap rates than the metro average. “There is the highest demand because occupancy is the strongest, rents continue to improve and the demand continues to be there,” notes Nooren. “It’s across the board [class-wise].”

Average price per unit is off about 25 percent from the 2006 peak of $200,000 per unit.

Nooren points out, “looking at the limited amount of supply and the huge demand, I feel that within this sector we’re really not dealing with a buyer’s market; we’re dealing with a seller’s market.”

Cap rates are hovering around 7 percent, reports Nooren, “which is sizably better than what it was back in ‘06 when we were dealing with 5 percent cap rates. Local investors are satisfied with the 7 cap, but we don’t see a great deal of out-of-state money coming in for 7 percent cap rates,” he adds. “All indications are showing that the valuation of apartments will improve over the next three to four years by as much as 25 percent from where we are today.

“It doesn’t appear that there is a strong drive by current investors to sell,” he adds. “They recognize that occupancy is strong and is getting better, rents are continuously going up and looking at the growth of the county, I think that even though we are in a budget crisis we’ll see the recovery to be fast and furious once employment returns.”