Military Contraction to Impact San Diego Multifamily Market

The downsizing of the U.S. military presence in San Diego is expected to have a long-term impact on the apartment market in the area, and not for the better.

San Diego—The downsizing of the U.S. military presence in San Diego is expected to have a long-term impact on the apartment market in the area, and not for the better, according to a new report by real estate investment specialist Marcus & Millichap. That isn’t to say, however, that market fundamentals will turn sour for landlords, especially in the near term. Like most markets, San Diego has benefitted tremendously from the decline in homeownership, both as a reality and an ideal, and that’s expected to be a positive force for the apartment market for some time to come.

Still, the report notes, Camp Pendleton and Miramar Marine Corps Station will transfer or deactivate 2,300 and 1,200 officers, respectively, due to budget constraints. Though the cuts will be gradual, the downsizing will adversely affect the metro’s rental market, since many service members and their families sought housing while working on these bases.

“This decrease in the rental pool, along with the recent surge in supply, could stymie rent growth, particularly in the B/C sector,” the report notes. “Nonetheless… strong job gains in the professional and business services sector, as well as the local biotech and pharmaceutical industry, will help to maintain above-average occupancy levels as young, newly employed workers avoid the high costs and uncertainty of the single-family market.”

In the immediate future, Marcus & Millichap predicts that builders will complete 1,300 rental units in the San Diego market this year, compared with a delivery of 446 units in 2011. The sharp jump in construction activity comes after two years of relatively mild additions to local apartment inventory.

Because of the additions to the market, metro-wide vacancy will edge up 20 basis points to 3.3 percent by the end of 2012, according to the report. Still, rental demand will remain strong, and vacancy will fall 60 basis points below the five-year average. Asking rents will rise 4.6 percent to $1,408 per month by the end of this year, which is the highest rate on record. Effective rents will climb 5.5 percent to $1,368 per month as landlords in San Diego continue to cut concessions.