From Mr. Nevin at MP Advisors:
With the release of our latest audit for San Diego, we get the most up to date look at the apartment rental market in San Diego. The report reveals a truth that has been true for some time – it is pretty hard to find a better place to own apartments than in San Diego
With over 117,000 units included in the survey, our apartment vacancy rate sits at 4.75%. That would be a desirable rate to have in the best of times, let alone in the face of broad domestic economic adversity. The national vacancy rate is at an all time high of 8%, but that doesn’t even begin to approach the vacancy factors seen in some of the more damaged rental markets.
Our neighbor to the north, the 800 pound gorilla of the apartment world, had vacancy rates nearly a point and a half higher than ours. San Francisco, was over ¾ of a point behind us in vacancy. The only two other major apartment markets in the country competing with us in terms of vacancy are Washington D.C with a 5.9% vacancy rate and New York at 3%. New York will always enjoy the kind of supply / demand ratio to maintain these kind of figures, and the District, of course, operates under virtual economic immunity when a Democratic administration is in office.
During the height of the last decade, many of the Sunbelt markets were seen as darlings for major investment and these markets are in shambles right now. Orlando, Dallas, Las Vegas, Charlotte and Phoenix all have double digit vacancy rates.
The best part of the deal for San Diego apartment owners, is they have been able to keep low vacancy with very little rent concessions. Rents are off 2% from their peak but are 20% higher than they were in March 2005.
Occupancies and rents are only part of the picture though, the other side is the market for buying and selling these projects. The combination of strong operating metrics for apartments in San Diego, weakened cap rates from 2-3 years ago, severely obtunded credit markets and a media proclaimed impending commercial real estate collapse, have resulted in no one selling who doesn’t have to. Since rents are relatively unchanged, NOIs are relatively unchanged and even with 75% LTV financing, these properties do not cash flow much differently than they did 2 years ago. That means very little distressed selling. The majority of distressed apartment sales in San Diego are actually failed conversions.
A search of Loopnet for San Diego apartment projects with at least 10 units that have been listed for sale this year turns up 38 listings. Of these 38, 5 or 13% of them are asking prices at lower than 5 ¼ cap rate and thus are really not doing much more than fishing, that leaves 33 projects for sale. Of the 33, nearly all are “C” properties, at best. Looking for institutional grade apartment projects in San Diego? Better pack a lunch. Further complicating the issue is the fact that there are hardly any market rate apartment projects under construction.
So for those who were fortunate enough to get in the driver’s seat in the San Diego apartment market, their cup overfloweth… for the rest, remember that patience is a virtue.
Rents are amazingly stable from market to market, as far as I can tell. Rents in cheaper areas aren’t that much cheaper than that in expensive markets, much less than the difference in home prices. A house that will rent for x in market 1 will rent for 2x in market 2, and it will sell for y in market 1 but 4y in market 2. That is, renting is a better deal in expensive areas and buying is a better deal in cheaper ones.
“Rents are off 2% from their peak but are 20% higher than they were in March 2005.”
Ouch. Remember a year and a half ago when this board was whipped up in a frenzy as people predicted an absolutely brutal freefall in SD rents? Fun times…
My rents in UTC have declined 20% probably due to the overbuilding.
Good Memory Jace–The sky was falling! I have said that the same holds true as far as retail space goes–Most of SD County was way underbuilt in the retail sector and has held-up quite well compared to other markets. The Office Market? That is another story!
I couldn’t imagine buying apartments in SD that are priced well above the cost to replace them and yield you less than 7% for all that rental headache and risk on dated/junky class C product. Plus they are still priced closed to peak values (for rental, not conversion projects) so where’s the upside???
I am with you Clearfund–However I think Jim may have been referring to “owning” apartments apartments in SD–as in those who already own them. In that case, they are at least providing a steady flow of income, even during these devistating times. There is a reason why they are trading at such low caps–such as the low vacancy and the low maint. per $$$ of rent colected–Let’s face it, it costs roughly the same to operate and to re-tenant a 2br apt in San Diego that rents for $1800 as it does for the same 2br apt in Dallas that rents for only $600, plus taxes are 1/3rd. But I am with you–I like to see 5 times gross like there are in Phoenix–but tough to get financing.
Multifamily has held up b/c apartments are a nice ‘growth’ area in a recessionary economy. ironic
For the areas I manage apartments(IB, Chula Vista & North Park), rents have been edging up with each turnover and vacancy is close to zero. You figure when we Property Managers turn in the rental surveys, the date of occupancy is pegged the first of the month, almost always filled before the end of the month, so vacancy is overstated at even 4.8%. Most of the owners I work with are buy & hold and for them it definitely is a good time to own.
From a past topic, I just mailed in the first quarter check to the Franchise Tax Board for out of state owners required of Property Managers (up to 7% of rents withheld). With all the paperwork about 40-50 hours of extra work for me for free…. thanks a lot Arnie.
Carmel Valley rents have decreased 10% from last year. Dan H’s rent decreased 20% in UTC. Besides, you’ve all heard stories about decreasing rents in 2009 – however the chart shows an increase for that year. That’s just too many divergences from real facts. Thus, I would question these statistics about 2% decrease.