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SAN DIEGO-The local apartment market is expected to remain solid throughout the rest of this year, as it continues to boast strong fundamentals, according to a recent report on the region published by Marcus & Millichap. The brokerage’s researchers predict that the vacancy rate will decline 50 basis points to 3.5%, while asking rents will rise 4.5% to $1,165 per month. This impressive performance is being fueled by several factors, including rising employment, declining supply and skyrocketing home prices. On the job front, employers expect to add a total of 31,000 new positions in 2004, according to Marcus & Millichap. Job gains decreased unemployment by 40 basis points in 2003 to 5.1%, a figure that is supposed to slide another 40 basis points by the end of this year. This expected employment growth is “going to bring more people into San Diego and keep those here that may be thinking about leaving,” says Kent Williams, the regional manager of Marcus & Millichap’s local office. “More people equals more demand (for apartment product),” he explains to GlobeSt.com.Demand is also strengthened by the increasing cost of homes in San Diego. With the median home price here up 24% on a year-over-year basis to $487,000, less people are leaving the rental market in search of their own home. And as demand continues to multiply, the supply of rental product is steadily declining, according to the Marcus & Millichap report. With an increasing number of developers buying up apartment properties to convert them to condos, the pool of rental product is shrinking. In addition, the production of new apartment product has drastically slowed, as Marcus & Millichap reports that it is down 34% in 2004, with 2,500 units slated for completion. Due to the multifamily market’s solid occupancy levels and steady rent growth, investors continue to chase San Diego apartment product. “Multiple buyers exist for every property that comes up for sale, which has driven prices higher over the past few years,” according to the Marcus & Millichap report. The prevalence of 1031 exchange transactions is also causing prices to rise, as Marcus & Millichap’s researchers say that nearly 50% of all apartment transactions included a buyer involved in a 1031 exchange. “These buyers are known for paying a premium for properties in order to meet closing deadlines,” the report notes. The median price of a San Diego apartment property rose 17% on a year-over-year basis in early 2004 to $117,000 per unit. Williams does point out that “from an investor point of view, they have to keep their eye on the interest rates because it’s a little more difficult to finance purchases at these cap rates.” Even if interest rates do go up, Williams feels that sales prices will remain at their current levels. “As long as the perception is that rents are going to continue to go up at a pretty good clip and as long as we have a minor movement in interest rates, the values will hold,” he tells GlobeSt.com.

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