Peter Scepanovic Scepanovic: “West of the I-5 freeway, the demographics are changing, and they have a stock of older housing product that is ripe for renovation.”

SAN DIEGO—Coastal North County has a lot of similarities with Downtown San Diego in the demographic shift of renters and renovation of older properties vs. the I-78 corridor, which attracts more passive investors, Colliers International’s SVP, multifamily advisory group, Peter Scepanovic tells GlobeSt.com. Scepanovic and Corey McHenry recently represented sellers—a private family operating as 1951 Front Street LLC, 2027 Front Street LLC and Torrance Street LLC—and two buyers—NP Ventures LLC, who purchased 2027, 2011 and 1951-57 Front St. and Sucato Family Trust, who purchased 715-39 Torrance St. All of the properties in the portfolio were multifamily assets in the Downtown submarket. We spoke exclusively with Scepanovic about the differences among the various multifamily-investment markets throughout San Diego.

GlobeSt.com: How does the apartment-investment market differ in areas closer to Downtown San Diego vs. North County?

Scepanovic: First, I should define North County because there are really two different markets: the I-78 corridor and coastal North County from Oceanside south. The latter is more similar to the Downtown market than it is to the rest of San Diego. Coastal San Diego is more like Downtown than inland in that it is gentrifying and a highly desirable area like Downtown. West of the I-5 freeway, the demographics are changing, and they have a stock of older housing product that is ripe for renovation. Much of the gentrification is attracting younger professionals and older empty-nesters who have the income and want to be in an area that’s transforming. This is similar to Downtown and the adjacent areas right around it like Bankers Hill, Golden Hill, South Mission Hills and North Park. The big difference between the coastal areas and Downtown markets is that the coastal area doesn’t have as much product that changes hands and is being transformed. There’s more activity down in that area simply because of the amount of product, but there are similar dynamics.

We sold a 50-year-old building in La Jolla late last year that had been owned by the same family for 50 years. It was bought to be renovated, similar to what we might find in Downtown or North Park. The magic in what makes renovations work is that post-renovation, you can achieve higher rent, which pays for the renovation. You have to have a sufficiently old enough building that requires renovation, of course.

GlobeSt.com: Is Downtown also attracting more investors because it is an emerging market?

Scepanovic: That’s one of the reasons. The additional catalyst is that you have a lot of new construction that’s projected—much of it in the East Village area, but basically attracting people to the Downtown area, whether it be mid-rise or high-rise or older product attracting young professionals. The extra dynamic in that growth Downtown is greater. Along the coast, you’re seeing more renovation, but Downtown there’s a great deal of new construction, which is part of the mix that is attracting more people Downtown.

GlobeSt.com: What types of investors are interested in North County vs. Downtown?

Scepanovic: It gets down to the defining—North County coastal vs. I-78 corridor investors. There’s a distinction between the investor that’s looking for the coastal or Downtown opportunities and the investor looking for I-78 corridor opportunities. The I-78 corridor investor is more passive and looking for properties that are mature to purchase for long-term hold. Maybe they will do some renovation, but not a transformation; whereas, on the coast and Downtown, investors are spending more money per unit to renovate older properties because of that demographic change and gentrification process being more acute.

GlobeSt.com: What else should our readers know about the apartment-investment market in San Diego?

Scepanovic: The apartment market is good. Countywide, we have a 2.5% vacancy rate, which is a 12-year low that’s close to historical lows. It’s a good environment in which to operate buildings, and it’s an attractive market compared to a lot of other markets that are more expensive and rents are higher like L.A. and San Francisco. Many Bay Area investors are also looking in San Diego. It’s a similar kind of coastal market with a nice Downtown corridor that’s growing, so we’re starting to see a little more of that. Overall, we’re an attractive market and still generally a supply-constrained market. The only area where we’re seeing substantial construction is the Downtown area, and that is mostly concentrated in the East Village for mid- and high-rise apartments. There’s not massive growth in the rest of San Diego, but there are projects here and there. We’re not in a position where supply should overwhelm demand.