Downtown San Diego has seen a huge surge in development activity in recent years. This year, the market is poised to deliver a record 2,453 new apartment units, with 2,000 already delivered in the first half of the year, according to new research from JLL. There are currently more than 3,600 apartment units under construction in Downtown San Diego with the remainder of the units scheduled for delivery in 2019 and 2020. The pipeline in Downtown San Diego represents more than half of the total construction activity in the market, and the East Village neighborhood is seeing the majority of the activity.
“After historically being a primarily suburban residential market, San Diego is undergoing a shift to urban living, and the City’s planning agency has simplified the approvals process for Downtown,” Darcy Miramontes, EVP at JLL, tells GlobeSt.com. “Younger renters, especially millennials, want to be closer to work and amenities, and Downtown is San Diego’s largest job center and entertainment hub. Developers have responded to this trend by increasing development in urban centers.”
This is significant apartment development activity, but it is hard to pinpoint what is driving it. Downtown San Diego has a 16.2% multifamily vacancy rate, compared to the market average of 4.2%, and the average rental rates in the market are also among the highest is San Diego, at $2,479 per month compared to the county average of $1,793 per month. In addition, San Diego is not a major jobs hub, and the majority of residents commute out of Downtown for work. However, San Diego overall is experiencing a housing shortage, and there is room for development downtown. “San Diego is in the midst of a decade-long housing shortage, so there is always pent-up demand for new apartments in the county, but because so many new projects are coming online Downtown at the same time new projects will have to compete for residents to see who can lease up first,” says Miramontes. “Once the submarket absorbs all the new inventory, vacancy and concessions will burn off.”
The vacancy rates, however, have actually helped to drive up rents in the market, according to Miramontes. The higher rents allow for a higher vacancy in new apartment buildings. “Downtown has the highest multifamily vacancy of San Diego’s submarkets, but also commands some of the highest rents. Downtown developers have made the decision to accept some short-term vacancy in order to lease up at higher rents,” she explains. “All this development is benefiting other businesses as well, as new office projects, bars and restaurants move into previously neglected neighborhoods, especially the East Village, which has seen the most new multifamily development.”