San Diego

San Diego multifamily sales surged in the second half of 2018 after a slow start to the year. According to research from CBRE, multifamily sales doubled in the second half of the year over the first of the year, however, the activity was on par with the second half of 2017, bringing the year in line with the five-year historical average. In addition, price-per-square-foot increased in the second half of the year.

“Second half gains in 2018 were driven mostly by several large sales. Sales of assets under 100 units by smaller private owners, who dominate the market, were about even throughout 2018,” John Newton, a broker in CBRE capital markets, tells GlobeSt.com. “So far,  1st quarter activity has been strong, driven by a number of large transaction that carried over from 4th quarter 2018. We expect a similar level of investment activity with larger deals moving the needle in terms of dollar volume.”

As multifamily sales picked up late in the year, cap rates continued to compress. Strong economic fundamentals and a dearth of housing supply have put downward pressure on cap rates. “Workforce and entry-level housing are in especially short supply,” says Newton. “Multifamily investors are then willing to accept lower yields, confident there will be little competition from new inventory that could threaten rent growth” In addition, lender appetite for multifamily product and high home prices have also fueled the low cap-rate environment. “Lenders are allocating more capital for multifamily while at the same time chasing fewer deals in the market. Investors have a lot of dry powder for new acquisitions with rates still at historic lows,” adds Newton. “Finally, home buying has not fully recovered  leading to more renters in the market.”

While the multifamily market in San Diego boasts strong fundamentals, investment activity was slightly down over 2017. “We see the lack of partly inventory driving that trend,” says Newton. “Additionally, many existing owners feel little incentive to trade when they enjoy a low property tax basis per California Prop 13 and while yields on new acquisitions remain low. Lower inventory also means fewer options to exchange into.”

Suburban multifamily let investment activity in 2019, followed by stable class-A and class-B product. In 2019, CBRE research expects cap rates to remain flat with strong demand for class-B and class-C value-add deals. “We expect cap rates to be mostly flat, particularly if the Fed continues to strike a dovish tone on rate increases,” says Newton. “There may be softening in some areas, but we expect continued strong demand and market conditions overall.”