San Diego is currently one of the most expensive rental markets in the nation. As a result renters have been seeking lower priced alternatives.
Vacancy has risen to 5.2% per CoStar. However this number is likely much higher as they are not picking up data on individual owners or smaller multi family that are managed by smaller property managers not apart of surveys. In some neighborhoods, the majority of rental housing is not institutionally run nor managed by large property management companies. In luxury properties, vacancy is higher at almost 8%.
There is also shadow inventory in the form of Short Term Rentals (STR). As various cities impose licensing, higher fees, or restrict the number of rentals or ban them, or they simply become not feasible financially, STRs can move to housing for sale or Long Term Rentals.
Rents in the highest cost areas of the County such as North County Coastal or UTC has seen some of the largest price reductions in rent. I continue to see a large number of offers on free rent or concessions being made to attract renters into newer buildings.
Construction starts increased at the end of last year despite the high cost of construction financing and labor, as much of the housing was years in the making. There are roughly 7800 market rate units across 49 properties being built. Downtown, Mission Valley, Balboa Park and the South I-15 Corridor face the most supply pressure as landlords have noted that properties from Balboa Park to Downtown have missed their lease-up projections in recent months. Lack of adequate parking is impacting how attractive rentals are.
However, overall rents have risen as the luxury rental market continues to rent despite overall higher vacancy. Remember, when the data gets conflated the luxury units that are renting well can lift overall rents, while rents in other categories are falling. Again, this doesn’t paint a full picture in neighborhoods that have smaller property managers or owner landlords renting out their properties.
Some property managers have noted tenants leaving to go back to their offices as they have been recalled by their employers to their home base and the end of work from home. On the plus side, the military stationed here continue to provide a steady pool of renters.
If you are not familiar, we have over 115,000 active military personnel stationed in San Diego across multiple bases. This does not include the civilian personnel. Between Camp Pendleton and Naval Base San Diego alone, over 100,000 personnel work on those bases. They are a steady source of renters as they are eligible for a Basic Housing Allowance
Looking at rentals on Zillow, surely it can’t be that hard to find a rental?
So what happens if you are a family seeking housing in San Diego County? You need a 4 bedroom, 2 bath, 2000+ ESF? And your budget is 7k? And you have a large dog?
Now imagine you want a specific neighborhood, specific schools, max commute distance? Or you want a home that has aesthetics or condition that are suitable?
Slim pickings. The multi-family world is missing out on middle housing including building housing that can serve more than just the needs of people who can live in studios or 1 bedrooms. Where are the 3-5 bedroom townhomes and apartments built to rent interspersed throughout neighborhoods in San Diego County?
New household formation is forecasted to expand over the next decade as 30-49 year olds grow in size, and Boomers are decades away from aging out of their homes as they are staying in their homes longer and opting to age in place.
There is opportunity to build more workforce, multi-generational and built to rent housing. Otherwise we will see more families leave San Diego due to lack of affordable housing and inventory in housing types that meet their needs. According to the US Census Bureau, more than 30,000 people left the county from mid 2022 to mid 2023 and reflected one of the highest levels of loss in 3 decades. This was offset by international migration of more than 10,000 people.
Where are renters finding more affordability? They are looking to rent smaller properties, downsize in buildings with smaller units, and looking for unrenovated properties to lower cost or moving to other areas of the County
When underwriting prospective multi-family properties to Sell or Buy, expect that investors will use more conservative rents even if the property currently has strong market rents given multiple signals of downward pressure on rents.
Over the past year, unemployment has been ticking up per the Bureau of Labor Statistics for the San Diego-Carlsbad MSA with unemployment for February sitting at 4.7%.