Jobs and New Units Put Pressure on Residential Market as Medical Office Sector Shows Signs of Life in San Diego

San Diego is a city of ups and downs and quite a number of contradictions that keep investors guessing in some areas, while the general consensus seems to be that the market is stabilized, if not improved.
San Diego - Employment Trends

San Diego – Employment Trends

San Diego—Though analysts are working on the numbers for Q3, there’s still a small window in which we can take a look at what Q2 had to show us about the real estate market in San Diego in 2014. San Diego is a city of ups and downs and quite a number of contradictions that keep investors guessing in some areas, while the general consensus seems to be that the market is stabilized, if not improved.

According to data provider Marcus & Millichap, 32,200 new positions were added in the city over the 12 months that ended in June 2014, which accounts for a 2.5 percent increase in San Diego’s payroll. That was an uptick from the 21,200 new jobs created during the previous 12-month frame.

San Diego - Completion and Permitting

San Diego – Completion and Permitting

The improving economic climate has pushed the homebuilders in the area to slightly ramp up activity, with around 4,000 single-family permits released in the city in Q1 of 2014, a rise of roughly 50 percent compared to the same timeframe in 2013. Multifamily permitting has had a slower start to its year, decreasing by about half to around 1,900 units in Q1. In terms of completions, 2,100 units were added over the 12 month period ending with this year’s Q2, including 850 units that were finished during Q1. The project bearing most of that load was 13th and Market, which added 264 residential units to the downtown area.

According to Marcus & Millichap’s most recent data on the San Diego multifamily market, construction is expected to provide average vacancy with an increase of 40 basis points by the end of 2014, an effective increase of around 4 percent. Apartment demand will also go up by 1.2 percent, in spite of the rise in vacancy. While rents will continue their slight appreciation, the year being set to see an average rate higher by around 3.5 percent compared to last year, 2014 will trail the previous year in year-over-year change, with 2013 having recorded an increase of 3.8 percent in rent rates. Marcus & Millichap’s projection places average effective rents at around $1,512 per month for the end of 2014.

San Diego - Medical Office Sector

San Diego – Medical Office Sector

One area in which San Diego has remained relevant and has continued to perform relatively well is the medical office sector. Vacancy in this sector has dipped over the past 12 months by 70 basis points to an average value of 9.9 percent, or about right on pace with the national average. The more encouraging number is the difference to the highest value recorded during the recession, as the current average vacancy is 320 basis points below. Keeping in perspective that the past 12 months have seen 400,000 square feet of medical office space come online in San Diego, it becomes even more apparent that the local market is slightly improving, and adding jobs to the SoCal city.

Charts courtesy of Marcus & Millichap.