San Diego Apartment Market Healthy for 2011

The San Diego County apartment market in 2011

An economist named Tom Lawler recently revealed a rather startling statistic: 43 percent of all Americans between the ages of 25 and 34 are living with their parents. That, folks, is 32 million people.

In our own San Diego County, the 25- to 34-year-old group tallies almost 500,000 people. And as soon as they get jobs and feel confident about keeping those jobs, they will, en masse, move out and rent their own apartment (although a few may buy homes or condominiums). They still may return home to have their laundry done or eat a nourishing meal occasionally, but they will be in their own residence.

We know from historical experience, that the 43 percent declines to less than a third in a healthy economy. Assuming that occurs this time around, that means about 50,000 people in San Diego County will be searching for a home they can call their own.

And that will create a small problem. In this county at the present time, there are only about 15,000 vacant apartments. In other words, there are some 300,000 rental apartments in San Diego County and the current occupancy rate is about 95 percent. Thus, only 5 percent of the units are vacant.

In recent days, I have spoken to numerous rental property management company executives and they have all been pleasantly surprised by the firming of the apartment market in recent months to the extent that most had no further need to offer concessions to attract new residents.

In the apartment business, 5 percent vacancy is the gold standard. That 5 percent represents, for all intents and purposes, equilibrium. At 5 percent vacancy rate, rents will rise in line with inflation, or in this environment, 1-3 percent; however, if vacancy rates decline to lower than 5 percent, then apartment owners are able to raise rents somewhat more aggressively.

We should note that rents in this county have been stable for several years and until very recently, it was necessary to offer concessions to attract new residents.

Apartment owners like occupancy rates lower than 5 percent, not only because they can raise rents, but they can be a lot pickier about the quality of their residents and the number, size and variety of the pets they can keep.

The health of the apartment market has encouraged developers to think about building new apartments for a change. In 2011, there will probably be a half dozen new projects of size that will break ground, and two of them have already. The largest of that group is at the Spectrum in Kearny Mesa where Wood Partners of Atlanta is building a 379-unit garden apartment project.

From an apartment investment standpoint, San Diego County has been ranked in the top five in the nation by almost every commercial brokerage firm. In many sunbelt markets, the vacancy rates have climbed to 15-20 percent with major concessions (sometimes two months free rent). Markets like Riverside County, Las Vegas and Phoenix are suffering greatly because of the combination of overbuilding and high unemployment and an unduly large number of foreclosed homes that are offered for rent by investor buyers.

Blessedly, this county has had comparatively few apartment units built in the past five years; has had modest employment losses and relatively few foreclosures, at least compared with most other places.

As a result of our highly stable apartment market, the investor community has opted to pay prices for apartment projects that are usually only seen in major bull markets. There have been a number of projects that have sold recently for more than $200,000 per unit and one for $300,000 per unit.

The big problem for brokers here is that nobody wants to sell because they all smell that the apartment market is going to get stronger and that they will be able to garner bigger and better prices over the next few years. Besides, if they sell, there is nothing to buy and then they would face capital gains. And that is unacceptable to any capitalist.

On balance, 2011 is going to be a very good year for apartment owners and not such a bad year for renters.

Apartment properties in San Diego County have been somewhat ignored during these past few dismal years in our economy. Virtually all the news has been focused on the sale of housing, office, industrial, retail and hospitality industries. Apartment owners have just been sitting around enjoying their high occupancies and rising values. And that's not such a bad thing after all.

via sddt.com

Posted via email from RealtorPeg