MF Construction To Slow as Year Progresses

SAN DIEGO—Despite strong demand for apartments, the number of units set to deliver in San Diego this year is expected to decrease this year—4,000 as compared to last year's more than 4,300 rentals—according to a report from Marcus & Millichap. The deliveries will enlarge the apartment stock in San Diego 1.4%.

John Vorsheck, first VP, regional manager, of M&M, who co-authored the report, tells GlobeSt.com, “Our data shows that 2015 will be the highest year for completions since the year 2000. In 2016, we will see a significant drop based on current projections slated for delivery that year. In 2014 and 2015, we have seen two consecutive years of strong delivery to the marketplace totaling almost 9,300 units. The projected drop is due in part to supply constraints in the current market as well as previously delivered product stabilizing after delivery.”

The report reveals that in the second quarter, developers completed 4,500 units year-over-year. The previous year, nearly 1,600 rentals were brought online during the second quarter. Construction was heavily concentrated in the Mid-City/National City and the Far North San Diego submarkets. Total rental inventory increased 5.1% in these areas as builders placed 965 and 810 apartments into service, respectively, according to M&M.

The largest project underway in the market is the Blue Sky apartments in Downtown San Diego. Developers are scheduled to deliver 939 units over two phases. Ground broke on the project late last year, and completion is scheduled for the latter half of 2017.

Overall, the thriving San Diego economy is drawing in apartment investors as well as young-professional renters, M&M reports. The high cost of single-family homes will encourage many new residents, particularly those recently graduated from college, to consider renting. Vacancy is also down, with average vacancy expecting to edge down 20 basis points to 3.2% this year, on net absorption of more than 4,400 units. Vacancy recorded a 20-basis-point decline last year.

All of these fundamentals are encouraging investors to place their money in this market, as well as boosting confidence among builders and motivating them to begin new projects. New multifamily development is largely centered in Downtown San Diego, targeting the rising population of young workers. Additionally, a couple of large apartment projects are underway in northeast San Diego. In these areas, the large construction volume will increase vacancy, though overall market trends will continue to improve, and tight vacancy will facilitate strong rent gains again this year, according to M&M.