MARKET SNAPSHOT: San Diego Transaction Activity Indicates Market May Have Bottomed Out

By Erika Schnitzer, Associate EditorSan Diego—San Diego’s apartment market has shown recent signs of stabilizing, according to a new Cushman & Wakefield Special Annual Report.  The report highlights countywide average per unit sales prices since 1986, along with six years of prices for 33 city and county areas.  The report shows that there were 456 sales transactions in 2008, down from 482 sales in 2007 and down 66 percent from 2004.  Despite this decline, the market may be bottoming out as the percent decrease from 2007 to 2008—just 5.4 percent—is a significant improvement compared to the 27.2 percent, 28.6 percent and 30.7 percent respective annual declines from 2004 to 2007. (Transaction volume was at its peak in 2004.) In addition, the overall average selling price per unit in San Diego County fell 17.7 percent in 2008, to $129,967. However, the countywide “adjusted” average selling price per unit was down just 1.2 percent in 2008, to  $125,512 per unit.Eleven of the 25 San Diego city and county regions surveyed in  2008 reported price-per-unit increases.  Two recent sales, totaling $84 million, signal a shift in the type of San Diego investor. Rather than the traditional institutional investor—who drove apartment sales activity to record highs between 2005 and 2007—the county is now seeing a trend toward private investors purchasing developments.The properties were purchased at approximately a 7.5 percent cap rate.According to Cushman & Wakefield’s research, 75 percent of all transactions involving projects with five or more units between 2004 and 2008 were purchased for more than $100,000 per unit. The report also shows that the average gross rent multiplier (GRM) used to show the ratio of gross scheduled income to the selling price was 10.22 in 2008, down from 11.84 in 2007. “Assuming an NOI of 60 percent of gross scheduled income converts the 11.84 GRM in 2007 to a 5.07 percent cap rate, the 10.22 GRM in 2008 results in a 15.8 percent increase in the cap rate to 5.87 percent for an improvement to any cash flow,” says George Carlson, associate director in Cushman & Wakefield’s San Diego office. In addition to the leveling of adjusted annual sales prices, the report shows that six of the 25 areas surveyed showed increased GRMs, while nine areas reported GRMs in the low nines or below. Using the 60 percent NOI assumption, a GRM of nine results in a 6.67 percent cap rate, or a 31.6 percent increase in potential cash flow from the 5.07 percent average cap rate in 2007.Click here for last week’s Market Snapshot on Detroit.