New Housing Starts Pick Up in San Diego

Housing deliveries are down this year in San Diego compared to 2018, but the pause seems to be temporary. The San Diego market, along with the rest of the State of California, is suffering from a housing shortage, and a recent spurt of land sales and construction starts is evidence that developers haven’t slowed down. According to reports from Cushman & Wakefield, recent land sales will lead to the construction of more than 5,200 new apartment units in the market.

“The general consensus is that the San Diego market is under delivering needed housing annually,” Tim Winslow, executive director at Cushman & Wakefield, tells GlobeSt.com. “Certain areas are experiencing heavier deliveries of units but those are confined to a few submarkets, namely East Village, Mission Valley and Grantville. The units in these markets are being absorbed slightly slower than developers would have hoped, although the buildings are staying occupied once fully absorbed, which means the market is still healthy.  The product that groups seem to fear the most is delivering high end units that must have top of the market rental rates, which is why many groups are aiming to develop Type III podium product versus Type I high rise construction.”

In fact, multifamily deals are currently dominating the current market activity for land sales. For San Diego, this is a more recent trend for the cycle. “Generally, we saw a multifamily market slow down at the end of 2018 when the stock market had a 15% correction,” explains Winslow. “Also during that time period the multifamily market was trying to adjust for the increased cost of construction and a 30-year mortgage rate spike in November close to 5%.  But as of the start of 2019, we were back to the races.”

Lower interest rates, which have dropped to a new low of 3.5% compared to 5% at the close of 2018, have helped to revive the market. “When you infuse the market with lower interest rates and a positive political environment that supports multifamily development along with avoiding increased development fees, the market will respond by delivering more multifamily residential units,” adds Winslow.

Housing affordability is a major concern in Southern California, but the new supply in San Diego could help relieve some of the rent burden. “The new housing delivers relief in terms of simple economics, supply and demand,” says Kevin Nolen of Cushman & Wakefield. “The more units on the market, the more options local residents have to select from, which creates pricing power in favor of the renter.  The most impact is on the second generation and older units, which tend to have to lower pricing of their product in order to maintain its residents, but still have modern amenities like a gym or a pool.  Keeping a healthy pipeline of supply will ensure that residents get better rental rates over time.”