SAN DIEGO—San Diego joins other cities in the renewed demand for urban housing, and like other markets, it is hampered by the lack of both apartments and condos, industry experts tell GlobeSt.com exclusively. With businesses and residents seeking space Downtown, a submarket that had struggled with high vacancy during the recession is now struggling to keep up with demand, they say.

“The biggest dynamic affecting the San Diego urban-housing market is the total lack of supply of new inventory,” Rhonda Slavik, director of business development at marketing and research firm Polaris Pacific, tells GlobeSt.com. “It's similar to what we've seen in other markets up and down the West Coast. San Diego and Portland are the next to move.”

Slavik says many developers and bankers have been hesitant to invest in San Diego, preferring markets like San Francisco and L.A. But now that the dynamics are a bit more robust, San Francisco has become very heated and L.A. is becoming that way, they're starting to turn an eye to markets like San Diego. “There is interest from a lot more developers in the San Diego market. We highlighted for them the total lack of inventory—no other West Coast market has this dearth of development. Finding financing for those projects can be challenging, but very recently it has come back.”

Slavik's firm focuses on condo development, and she says the single biggest factor in preventing condo development in San Diego has been lack of construction financing for this product type. “Now that that part of the equation is becoming more comfortable, they're opening their pocketbooks. There's a growing demand, and developers are starting to pay attention to it. There are more people chasing fewer buying opportunities, and year-over-year price growth is another indicator.”

She adds that pricing in Downtown San Diego's condo market can be misleading because there has been an 18% price drop in the East Village, but “the sample size is so small that it could be four high-end units in a group of 20 this year that were otherwise entry-level housing. This year, San Diego is pushing $500 per square foot on high-rise units, but there's nothing to buy. This is a spectacular opportunity to take advantage of that demand.”

Due to land constraints, San Diego development tends to be limited to adaptive re-use, as GlobeSt.com reported earlier this week. “The Gaslamp is fantastic—lots of old buildings, but most are spoken for and wouldn't make sense as residential,” says Slavik. “There's an opportunity for smaller infill projects, though, and this cycle is seeing a lot more developments between 30 and 150 or even 200 units. Financial partners are open to projects of hundreds of units.”

The Smart Corner condos at 11^th and C St. Downtown demonstrates the demand for Downtown properties in San Diego. Polaris Pacific spearheaded the marketing effort for the project, and it averaged 20 sales per month during in 2012, a strong number. “Smart Corner's 20 sales a month in 2012 were a strong market indicator of demand following a long road through the development cycle,” says Slavik. “Developers and financiers are cautious of market cycles, but today's dearth of product amid rising demand and prices signals a return of new condo construction soon.”

Stephen Duffy, managing director of the real estate practice at Moss Adams Capital, tells GlobeSt.com the region's urban-housing market is “in equilibrium. You've got demand that exceeds supply, and that's across both the condo and multifamily markets. All of the condos that got into trouble during the Great Recession in San Diego, which were then converted to rental property for period of time, have all been sold and cleared, indicating the health of the residential marketplace. Then, you had the new supply built in the last couple of years on the multifamily side work its way to stabilization and prosper. For me, the big news in Downtown San Diego is you have a residential marketplace that's grown, remains in equilibrium and has continued demand for new units by Millennials and empty-nesters looking to move Downtown.”

Duffy says we couldn't have a better capital market for multifamily housing on a national level, period. “We may be experiencing a once-in-a-lifetime real estate capital market for multifamily in the US. Now, overlay a template of the coastal cities, of which San Diego is one, and you're turbo-charging a very positive situation. Also, the search for yield that is a global challenge directly related to real estate allocations and investments drives them into the best US markets, and San Diego is one of those. When we see things like the Swiss Bank move, the European community with their quantitative easing, the oil price collapse and the Fed considering deferring rates, it all goes into the mix of context whereby if you can protect your capital and receive what is a single-digit unlevered return, you are in a metro area that you feel positive about from both a current and a long-term point of view. You're going to look for investments and be very receptive to opportunities coming to you from that location, and San Diego is one of those. It has company—San Francisco, New York, Boston, Seattle—but the global demand for capital protection, yield and for what is considered quality, long-term assets is far greater than the availability of multifamily product from an existing-asset-base and development pipeline point of view. Right now and in the foreseeable future, we're in a virtuous cycle in multifamily, and San Diego benefits from this.”

Among the changes the San Diego market has endured over the last several years are changing land prices, says Duffy. “Land in urban cores has escalated, so the per-unit price of ground has increased, which increases the cost of development. Also, construction costs have increased, and the contingencies devleopers have put in their construction budgets are significant—and appropriately so. They're focused less on commodities and more on labor and construction costs.”

But perhaps the more looming issue for multifamily is the single-family homebuilding business, Duffy adds. “It's not how Millennials react to household formation that matters, but family formation. When the Millennials who are renting become parents, they're going to move out of apartments and seek the American dream. They'll be looking for more space in the home and for a good school district they can acquire with their property taxes.”

Another issue affecting the housing market is median pricing. Polaris Pacific found that San Diego's median price was up 12.4% during the period between October through December 2014 as compared to that same three-month period a year earlier, the strongest rise in Southern California, but sales volume was down 15.2%, with only 168 sales occurring. The reason for the disparity is not just pent-up demand, but a big migration toward urban areas, says Slavik. “It's a reversal of what happened in the '50s, with a return to the urban core. San Diego has traditionally been a more urban city, and Downtown has evolved drastically in the last 15 years—it has a lot to offer.”

Slavik adds that many people are choosing to live Downtown over living at or near the beach. “It's easier to get around, and in San Diego, the product types fall into a pretty small window. To live in a high-rise or something new or modern, you have to go Downtown; otherwise, you're in a garden-style low-rise apartment that's pretty dated—unless you go to La Jolla or Del Mar. People are paying more to be downtown for the square footage, but also for the new modern environment you can't get in most other areas.”