SAN DIEGO—With 5%-plus annual multifamily rent increases in most submarkets over the past five to seven years and average rents in San Diego County approaching $1,800 per month, new construction makes sense at last, Phoenix-based ABI Multifamily's partner Patrick Doyle tells GlobeSt.com. The firm recently released a report showing increased San Diego multifamily construction deliveries in Q3. We spoke with Doyle and fellow partner and director of research Thomas Brophy about the report and the state of multifamily construction in this market.

GlobeSt.com: What do you find interesting about this report?

Brophy: What's interesting to me is that after 10 years of somewhat muted construction (averaging 2,000 unit deliveries per year for the previous 10-year period), the metro is on track to see its highest delivery rates since 2005's 3,951 unit deliveries. Although population growth has slowed over the past five years, the metro is up some 17% from 2000 and will need more unit deliveries to 1) allow for more population growth, since purchasing a median-priced home of nearly $500,000 presents a significant feat for the consumer, and 2) at very high occupancy levels (currently 97%), demand is still continuing to outpace supply.

GlobeSt.com: What is driving the increased multifamily construction deliveries we are seeing from this report?

Doyle: With 5%-plus annual rent increases being the norm in most submarkets over the past five to seven years and average rents in San Diego County approaching $1,800 month, the economics of building new product finally pencils out. Even with the addition of approximately 3,200 units in 2016, this reflects less than 1% of the county's total apartment inventory, which is currently 97% occupied. A market is considered at a healthy equilibrium with a 5% vacancy factor, so the high renter demand should keep operations strong for the foreseeable future.

GlobeSt.com: What type of product is being delivered compared to the type of product that is most needed in this market?

Doyle: The vast majority of the multifamily product currently being delivered or in the pipeline is considered “class-A” rentals. Millennials have opted to rent heavily amenitized units in dynamic neighborhoods that give them the hassle-free living not found with homeownership, the flexibility to move easily as their jobs may demand, as well as satisfying the Millennial cultural characteristics of preferring experiences over the accumulation of material goods or investment assets. This is demonstrated with this generation sharing photos of their local dining experiences or adventure travel locations found on the various social media sites. They enjoy living where the action is and having the ability to lock the door and leave without having to worry about property upkeep, maintenance etc.

This higher-end apartment product is highly amenitized, allowing the operator to capture the top-tier renter willing to pay for resort-style living in hip neighborhoods. These luxury properties often include spas, 24-hour sports clubs, pool decks with cabanas, electric-vehicle-charging stations and pet-washing stations. Interiors are appointed with gourmet kitchens, top-end fixtures, appliances, smart-home electronics and concierge services.

But the pool of potential renters that can pay upwards of $3,000 to $4,000 per month can only be so deep. Many prefer to live alone and would be satisfied with a studio, or what is becoming known as a micro-unit. Typically, these micro-units are studios or small one-bedroom apartments of less than 400 square feet. They are becoming popular in Seattle, San Francisco and, of course, New York City. Certain walkable submarkets in San Diego County would be a good fit for such product type and would supply desperately needed affordable workforce or student housing. Given the ideal climate we have here in San Diego, a micro apartment with usable common area and outdoor spaces would fill the void and be a nice alternative to sharing a larger space with a roommate. Some locations that I think would greatly benefit from this type of product would be Little Italy, Midtown and the North County coastal downtown neighborhoods of Encinitas, Carlsbad and Oceanside.

GlobeSt.com: What is your reaction to the failure of Measure B?

Doyle: Proponents to Measure B argued that the development of 1,700 homes in Lilac Hills would ease the housing shortage, but that was a huge exaggeration. The reality that San Diegans are confronting is that we are no longer able to supply the required housing units in newly developed single-family neighborhoods, and the trend is for higher density in the more urbanized areas. Therefore, attached product, such as townhomes, condos and rental apartments, are more commonplace. A recent example of this tug of war is the failure of Measure T in Encinitas, which would have allowed for increased housing density within specified areas. After 140 community meetings to gain community support and the knowledge that this measure would also bring the city into compliance with the California housing law and prevent future lawsuits, it failed at the polls with 56% of residents voting no.

GlobeSt.com: What do you find interesting about this report?

GlobeSt.com: What is driving the increased multifamily construction deliveries we are seeing from this report?

GlobeSt.com: What type of product is being delivered compared to the type of product that is most needed in this market?

GlobeSt.com: What is your reaction to the failure of Measure B?

Instant Insights /

Building New San Diego Apts. Finally Pencils

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