Multifamily Market Rides Rental Wave PROPERTY: Demand Fuels Apartment Deals

The rising cost of buying single-family homes in San Diego County is pushing more people into the renal pool, and that is turning up the pace of apartment rent growth and property deal-making.

Data from brokerage firm Colliers International shows that the region saw 144 properties with 10 or more apartments change hands from January to July, up more than 30 percent from the same period of 2014. The total sales price on those 2015 deals topped $1.05 billion, an increase of nearly 67 percent.

In its own recently issued third-quarter report, Marcus & Millichap Inc. noted that the high cost of single-family homes will encourage many new local residents, especially recent college graduates, to consider renting. The brokerage firm said slow wage growth over the past few years has restricted the ability of many renters to save up for a down payment; the minimum income required to afford a median-priced local home is around $108,000- roughly $40,000 higher than the county’s household median income.

That picture of a consumer squeeze was reflected by findings from real estate data provider Zillow Group, which said San Diego apartment renters spent an average of 43.7 percent of their income on rent in the second quarter on 2015. “We’re now experiencing what the San Francisco Bay area has been experiencing for the past two to three years.” said John Vorsheck, first vice president and regional manager in Marcus & Millichap’s San Diego office.

Opportunities for Owners

The tough market for renters has brought opportunities for apartment owners, including recent sellers and investors. Vorsheck pointed to a climate that includes ample sources of investment capital, financing rates that remain historically cheap at around 4 percent, lack of apartment supply relative to rising demand, limited space and other barriers to entry for those looking to build new inventory.

Peter Scepanovic, a senior vice president based at the Carlsbad office of Colliers International, said the county’s low apartment vacancy rate, currently at around 2.5 percent, has helped push rents up 9 percent over the past 12 months.

The owner-favored environment this year has created a spurt in property deals in areas of the county that weren’t seeing a lot of activity just a year or two ago, especially East and South County communities including La Mesa, Lemon Grove, El Cajon and Imperial Beach, along with portions of North County.

In many cases, local deals involve older properties in “B” or “C” locations that have sold for relatively strong prices after owners invested in renovations that helped drive up rents. `“It reflects the fact that you have owners now in these B and C markets who are investing in these upgrades and improving the overall local housing stock,” Scepanovic said.

When Encino-based New Standard Equities (NSE) recently purchased a 74 unit apartment property in Spring Valley for $14 million, in a deal brokered by Cushman & Wakefield Inc., NSE founder and CEO Edward Ring pointed to the region’s tight, below-3-percent apartment vacancy rate.

Ring also said the company planned to invest more than $1 million in upgrades to the property, which was built in 1976.

The landlord-slanted local climate prompted the Irvine Co. to recently complete a $150 million renovation of its 1410-unit apartment property, now known as The Village Mission Valley, in the high-demand Mission Valley submarket. Irvine Co. officials said that renovation marked the largest apartment reinvestment in its 151-year history.

Irvine Co. in 2013 purchased that apartment property, built in 1989, for $360 million, according to CoStar Group and public data.

Choosing to Rent

Scepanovic noted that in the region’s “A” locations, such as North Park and Hillcrest, apartment demand is also being driven up by those who could actually afford to buy but choose to rent.

In the highest-demand neighborhoods, including San Diego’s central and coastal markets, new ground-up apartment construction continues to sprout.

Phoenix based Alliance Residential Co. recently purchased a 1.2 acre land parcel in North Park for $7.1 million, with plans to develop a new 118-unit apartment community, brokerage firm CBRE Group Inc. reported.

In San Marcos, Seattle-based Intracorp Cos. Purchased two parcels totaling 11.8 acres for $17 million, with plans to build a 416-unit apartment community, according to Intracorp and brokerage firm Land Advisors Organization.

A recent survey report by the law firm Allen Matkins and UCLA Anderson Forecast said multifamily construction in California will achieve a 25-year high during the next three years, due to rising demand for apartments amid low current supply. However, brokers note that locations for big new local developments remain sparse beyond places such as San Diego’s East Village.

“There are only so many places that have the space to build the kinds of projects you’re seeing downtown,” said Vorsheck, adding he expects current countywide apartment trends to last well into 2016.