Developers continue to increase production of multifamily housing in San Diego, capitalizing on elevated demand in the rental market.
Multifamily permit applications have shot up this year, nearing their 2008 level, as strong population growth, strict lending standards and still-high foreclosure rates have conspired to push vacancy rates down, and rental rates up.
Through seven months, developers have pulled 1,940 multifamily permits in San Diego County, more than double the totals of 844 through the same period last year and 744 through July of 2009, according to data provided by the Construction Industry Research Board.
Last month, builders pulled 365 multifamily permits, up from 34 in June and 80 last July.
June’s low monthly total, along with the zero permits pulled in May, reflect the inherent volatility of housing permits: Monthly totals can be skewed if a single large project pulls its permits on the first day of one month rather than one day earlier.
More important is the year-over-year comparison, which makes clear that multifamily construction is on the upswing.
“Multifamily is the strongest commercial real estate sector in San Diego without a doubt,” said Darcy Miramontes, executive vice president of Jones Lang LaSalle.
Total home building permits have increased in 2011 even while single-family permits have decreased.
So far this year, municipalities have issued permits for 3,398 housing units, 42 percent more than the 2,389 issued through seven months last year.
But that increase owes itself entirely to increases in the multifamily market. The 1,458 single-family permits issued this year are 5 percent fewer than the 1,545 a year ago.
Of the 497 permits issued last month, only 132 were for single-family homes.
“Developers are reacting to the weakness in the market by shifting from single family to multifamily,” said Alan Gin, professor of economics at the University of San Diego, who also compiles the index of leading economic indicators for San Diego County, of which housing permits is one.
The new-home market has struggled to compete with distressed properties that have flooded the supply of single-family homes for sale. Not only are those properties fulfilling the demand that would normally be met by new homes, but they also sell at prices far below the cost of construction, land and permitting for a new single-family unit.
Additionally, those foreclosed homeowners are absent from the buyer pool, forced to rent while rebuilding their credit. And current lending restrictions, with down payments averaging 22 percent, keep many interested parties from qualifying for a mortgage.
San Diego also has a higher share of “echo boomers,” those aged 20 to 34 years who are far more likely to rent.
And while the population has grown at an average 0.9 percent rate over the last decade, total apartment-unit growth has increased only 0.3 percent over the same period, according to Miramontes.
All of these factors have resulted in low vacancy rates and high rents, both of which make apartments an attractive investment in the current climate.
“Some people are losing homes, and others aren’t being able to buy, so the strength is in the rental market, and that’s where the construction activity went,” Gin said.
“The unaffordability in housing generally in San Diego continues to drive demand on the rental side,” Miramontes said, noting that even with low home prices and interest rates, local average rents are still below the average cost of a mortgage.
Miramontes projects rents will increase between 2 and 4 percent on an annual basis this year.
“Since population growth in the last decade has outstripped supply, the growth in the multifamily market is anticipated to continue over the next few years,” she said.
Total housing permit activity in the county is on pace to increase significantly on a percentage basis for the third consecutive year.
But it’s also on pace to be the third lowest total on record, with 2009 and 2010 being the worst and second worst, respectively.
Members of the construction industry have stressed that large percentage increases aren’t cause for celebration as long as they rely on historically low baselines.
The San Diego Building Industry Association has said the county needs to build 15,000 homes per year to keep up with population growth.
Instead, developers pulled permits for just 2,990 in 2009, and 3,346 last year, a total already eclipsed through seven months of 2011.
Experts have warned that the difference in needed units and actual construction is setting the stage for a severe housing shortage that will lead to a drastic price spike once the economy recovers and normal buying patterns resume.
Gin said building only 5,000 homes in a year would be a serious problem in a normal market, but a sizable increase in production in a short period of time isn’t an unreasonable expectation, if conditions were to improve.
“Once mortgages start flowing, I wouldn’t be surprised to see gains of an extra three to four thousand units authorized per year,” he said.
Building industry spokespeople have lobbied extensively for local jurisdictions to increase production by reducing impact fees associated with housing construction. They say the fees are based on boom-era prices and now represent an unrealistic percentage of the cost of a home, given the reduction in values
Via www.SDDT.com
