SAN DIEGO—While multifamily construction is definitely up from the recession years, the new supply being delivered annually is not meeting demand, requiring more cooperation between developers and municipalities, JLL EVP Darcy Miramontes tells GlobeSt.com. According to the firm's recent San Diego Multifamily Market Overview, 2015 and 2016 both broke previous records for San Diego multifamily starts in both number of units and dollar value; however, San Diego's new multifamily supply is only 0.7% of inventory, compared to 2.1% for the top 10 supply markets.

The report also showed that developers have shifted their focus from Mission Valley to Downtown for urban-core development and from North County to South County in search of available land. In addition, San Diego has one of the lowest multifamily vacancy rates in the country, and the 3.8% current rate is below the 4.1% historical market average; it is expected to stay at approximately 4% through 2020.

The report also revealed that 77% of the San Diego multifamily buyers in the past 12 months have been private investors, with 10% being institutional investors. And cap-rate spreads over the Treasury rate have started to contract, falling to 270 basis points in San Diego at the end of 2016 after peaking at 450 basis points in 2012.

We spoke with Miramontes about the multifamily supply pipeline and what would encourage greater development in this market.

GlobeSt.com: How would you describe the new multifamily supply in San Diego?

Miramontes: The answer is twofold. First, in terms of meeting the housing demand that San Diego County and the City of San Diego would like to see, it's falling short—and that goes for rental and for-sale housing. There is not enough housing supply to keep pace with demand drivers such as population growth and in-migration. Urban planners recommend 1.5 new jobs for every housing unit, and in San Diego, the ratio is 10 to 1 or greater. San Diego consistently falls short of housing demand, with 30,000 people are moving into this region annually. Second, from a real estate developers' perspective, San Diego is a sound multifamily market with strong fundamentals. For most West Coast developers, San Diego is a target market. Although there are some near-term supply concerns in some pockets in San Diego, including Downtown's East Village, most developers have little concern about the long-term health of this market, based on the supply demand imbalance described above.

GlobeSt.com: Are developers delivering properties at a good pace, or does more need to be done?

Miramontes: Developers are moving as fast as they are permitted. Throughout San Diego County, from Oceanside to Otay, there are multifamily developments in the works. Although the construction lending market has tightened up in 2017, there are still plenty of developers, equity groups and lenders looking to build in San Diego. This development is often slowed by regulations and processes at both the local and state level. In San Diego County, there are many different municipalities, community groups, and neighborhoods that are involved in the development process. All of these factors combine to slow down the pace of new development in San Diego. Moreover, market factors such as rising construction costs and the scarcity of available land, in addition to regulatory issues, play into it. Developers are concerned that once they purchase land, they won't be able to build, so they have to weigh their risks and rewards carefully.

GlobeSt.com: What would encourage more multifamily development in this market?

Miramontes: Over the coming three to four years, we will see more deliveries of multifamily product in San Diego than we have in recent years, which is great. However, the supply of multifamily still isn't going to meet the demand. This supply increase is good for San Diego and expected to be easily absorbed. Moving forward, it would be nice to see more private-public partnerships, both officially and unofficially, where all parties sit at the table and find housing solutions that work for San Diego. It would be a win-win for the cities to team up with developers.

GlobeSt.com: What else should our readers take away from this report?

Miramontes: San Diego is one of the most fundamentally sound multifamily markets in the country because we have natural barriers to entry, limited supply growth, a diverse economy and high quality of life—no long-term supply concerns in our county. The median single-family home price is just under $600,000 now, and it would be great if the cities within the county could work with developers to expedite the planning and development of multifamily, encouraging not only class-A product but also class-B product to be built to address workforce housing demands.

We spoke with Miramontes about the multifamily supply pipeline and what would encourage greater development in this market.

GlobeSt.com: How would you describe the new multifamily supply in San Diego?

GlobeSt.com: Are developers delivering properties at a good pace, or does more need to be done?

GlobeSt.com: What would encourage more multifamily development in this market?

GlobeSt.com: What else should our readers take away from this report?

Instant Insights /

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