San Diego Multifamily Market Report – August 2023

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San Diego Multifamily Market Report – August 2023

Chris Nebenzahl

Chris Nebenzahl

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San Diego Maintains Strong Growth While Peer Markets Cool

Over the past three years, one of the steadiest and best performing markets nationwide has been San Diego. The Southern California metro did not experience as significant of a decline in housing demand and rents seen in Los Angeles and San Francisco in the early days of COVID-19, but the metro had a very strong recovery in 2021 and 2022. This year, as other hot secondary markets in the southeast and southwest have cooled down rapidly, San Diego has maintained its growth, and is still seeing annual rent increases in most submarkets. The combination of a limited downturn and consistent rent growth has pushed San Diego to the fourth most expensive metro in the country for net effective rents.

Demand remains elevated in San Diego and new supply will not be an issue. As rents grow, affordability may become a concern once again, however in the short term, San Diego is poised for great multifamily performance.

MSA Market Snapshot San Diego CA

Radix Rent and Operating Performance

From a fundamental perspective, San Diego is outperforming the national average in all categories except for traffic and leases. Not only are the overall metrics outperforming, but the rate of growth or deceleration is far superior to other secondary markets nationwide. Constrained by regulation and geography, San Diego is not at risk of overbuilding, which should allow for continued strength in the local multifamily market.

Traffic and Leasing

  • Traffic and leases are the only metrics that lag the national average. San Diego apartment communities average 6.8 tours per week and 2.1 new leases signed per week as of mid-August.

  • While overall demand is softer than other markets, both traffic and leasing have increased on a year-over-year basis.

  • The most traffic is in submarkets north of San Diego, as the Clairemont/Linda Vista Mission submarket, just north of downtown, averages 10.6 tours per property per week. Further north, the Vista submarket is also doing well, averaging 9.6 tours per week. Downtown San Diego ranks third among submarkets, as properties see an average of 8.8 tours per week.

  • Clairemont/Linda Vista Mission also leads all submarkets in new leases signed at nearly four new leases per property per week. Mira Mesa/Rancho Bernardo is also leasing well, as properties are averaging more than three leases per week.

  • Despite relatively low traffic and leasing numbers, Oceanside maintains the strongest conversion ratio, as more than half of all tours turn into leases in the northern coastal submarket.

Traffic and Leases San Diego
Source: Radix

Occupancy and ATR

  • San Diego’s occupancy rate of 95.5% is one of the highest in the nation. Considering its leased percentage is nearly 97%, housing demand is strong across the metro.

  • Both the occupancy rate and the leased percentage are down on an annual basis but remain elevated compared to peer markets.

  • The Mira Mesa/Rancho Bernardo submarket is one of the tightest in the country, with an average occupancy rate of 97% and a leased percentage of 99%. The average property only has 6 apartment units available to rent over the next 60 days.

  • Vista, further north of Mira Mesa/Rancho Bernardo also maintains tight occupancy, with an average occupancy rate of 96.5%

  • The Balboa Park/West of I-5 submarket is the only submarket that may be struggling. Its occupancy rate is 94.0% and occupancy has fallen more than 2% in the past year. Even with the decline, the submarket trails the national average by only 20 basis points.

  • The number of units available to rent across San Diego is low, as the average property has 12 units available in the next 60 days. However, this figure has increased roughly 70% in the past year.

Occupancy Rate San Diego, CA
Source: Radix

Net Effective Rent and Concessions

  • Across the metro, net effective rents are up 1.7% compared to this time last year. While the growth rate is slower than average, it reflects one of the best performing markets in the country. Most markets have experienced rent declines in the past year, so San Diego’s growth puts it firmly in one of the leading spots for rent performance.

  • Not all submarkets are growing, however. Rents in La Jolla/University City are down 4.1% on a year over year basis. The submarket boasts the second highest rents in the MSA, trailing only the North Beaches submarket, and the slow down in rents may be attributed to general affordability in the area.

  • The La Mesa/Spring Valley/Lemon Grove submarket has experienced the strongest growth in the past year, as rents are up roughly 6% since last August. The average rent is more than $200 below the MSA average in La Mesa/Spring Valley/Lemon Grove, so the submarket may have more room to run from a rent growth perspective.

  • Concessions have increased in San Diego, but only modestly. On a year-over-year basis, concessions are up 7% in the MSA, compared to a 57% increase nationwide. The average concession in San Diego is $22 per unit per month.

NER and YOY NER San Diego, CA
Source: Radix

Employment Trends 

  • San Diego’s job market remains strong, although there may be some cracks starting to form. The metro unemployment rate was 3.3% in April but jumped to 4% in June. Unemployment remains lower in San Diego than in California as a whole, but the national unemployment rate of 3.5% is 50 basis points below San Diego’s.
  • With that said, job growth continues onward. Over the past 12 months, more than 38,000 new jobs have been created across a variety of sectors.
  • San Diego is a national leader in life sciences and biotech research, but it also boasts a very well balanced employment market. None of the major job sectors hold more than 18% of the overall employment base, and five sectors have more than 10% of the labor pool. Given its climate and size, I expect San Diego will continue to attract talent and employment from other parts of California.
New Job Formations San Diego, CA
Source: Bureau of Labor Statistics
Unemployment Rate San Diego, CA
Source: Bureau of Labor Statistics

New Construction Pipeline

  • As evidenced by the continued growth in operating fundamentals, supply and demand are well balanced in San Diego. Across the metro, 64 projects are currently under construction.

  • Many of them are in the Downtown and urban neighborhoods, but there is also steady development going up Interstate 15 into Poway and Escondido. The North Beaches are also seeing development, with a handful of projects scattered between Solana Beach and Oceanside.

  • Given the regulatory challenges in California as well as the cost of new construction, I do not expect to see a huge run-up in supply in San Diego. Some projects in planning may fall out of the pipeline, but in all likelihood, they will deliver in a few years.

  • Overall, the San Diego market remains poised to be one of the strongest and most balanced multifamily markets in the nation for the foreseeable future.

Construction Pipeline San Dieog, CA
Source: BuildCentral

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