Multifamily Prices Rise in San Diego, as Newer Assets Begin to Transact

Operating conditions in the San Diego multifamily market have softened a bit in response to an accelerating pace of new apartment construction. Vacancies have inched higher in recent periods and rents are essentially flat, the longer-term apartment demand drivers remain in place, and operators should continue to expect steady property performance. The overall vacancy rate ended the second quarter at 4.2 percent, and the market vacancy has remained between 3.5 percent and 4.5 percent during the past five years. Vacancy is concentrated in Class A units and in submarkets where new development has been most active. More than half of the submarkets in the San Diego market feature vacancy rates below 4 percent, with a few submarkets having vacancy rates of 3 percent or lower.

The investment market has produced some mixed results through the first two quarters of 2024. Sales velocity has been steady to this point, with transaction counts in the second quarter closely tracking levels from the first quarter. While the number of properties that are selling has been consistent, pricing trends have been more volatile. Per-unit prices peaked in 2022, before dipping last year. To this point in 2024, prices have rebounded. In recent months, a handful of properties that have been built in the past decade have changed hands. These properties have traded between $425,000 per unit and $550,000 per unit. Older, Class C properties have continued to transact as well, and these assets have generally sold for between $240,000 per unit and $350,000 per unit. While prices have fluctuated based on vintage, cap rates have remained between 4.5 percent and 5 percent.

Looking ahead

While there may be some fluctuation in operating fundamentals in the coming quarters, moves in the San Diego multifamily market will likely be small, reflecting the overall consistency in property performance. This year will be an active one for new deliveries, presenting some continued supply-side pressures in the Class A segment in a handful of submarkets. Outside of the top-tier, Class B and Class C properties are expected to continue to outperform. Vacancies across Class B and Class C properties are low—averaging just 2.5 percent—and these tight conditions, coupled with the persistent affordability challenges in the San Diego region, will result in continued steady demand for less expensive units.

The local investment sales market may be poised to begin picking up in second half. Cap rates are higher than in recent years, somewhat offsetting the impact of higher borrowing costs, and most forecasts call for lower lending rates in the near future. These trends may be enough to move a few investors off of the sidelines and prompt some additional transaction activity. The current mix of properties that are selling is unlikely to change dramatically, with Class C assets under 150 units representing the bulk of the transactions, helped by their low vacancy rates and continued ability to post rent increases.

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