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Demand For Multifamily Is High In San Diego, Yet It's a Challenge To Develop More

Developers active in San Diego have never seen higher demand for multifamily housing than now, according to the speakers at our San Diego State of the Multifamily Market event. And yet, supply is not meeting demand, except maybe at the tip-top of the housing market.

For those properties that are being developed, flexibility in design and sustainability are two key considerations for both owners and residents, the speakers said.

Demand For Multifamily Is High In San Diego, Yet It's a Challenge To Develop More
Wood Partners Vice President Will Winkenhofer, Wakeland Housing & Development Corp. President and CEO Ken Sauder, Verdani Partners founder and President Daniele Horton, Greystar Managing Director Robert LaFever, Robin Wilson Interior Design design principal Robin Wilson and Allen Matkins partner Matt Marino, who moderated

Development is a challenge overall, especially outside the upper end, Greystar Managing Director Robert LaFever said.

"Construction and land costs are high, permitting time frames can be long and regulations add to the expense," he said. "That means that for a large part of the workforce, few apartments are being developed for them, despite the high demand."

Wood Partners Vice President Will Winkenhofer wondered how developers will address the housing shortage in greater San Diego.

"Over the next 14 years, San Diego will need 70,000 new multifamily units," he said. "That's 5,000 new units a year, while historically the market has produced an average of only 3,500 a year."

There is a shortage of land, zoning limits density and state regulations increase the cost of doing business, he said.

"Homeownership and household formation are being delayed, so the demand for apartments will continue to be strong. It's a steep challenge."

Wakeland Housing & Development Corp. President and CEO Ken Sauder, whose company is an affordable housing specialist, said demand is so strong that affordable housing development amounts to a "build it and they will come" situation.

Policy in San Diego and California is changing to promote housing development, Sauder said, but there is a lot more to be done.

"About 40% of housing costs are fees and regulations," he said. "All of that isn't going away, but we need to work to trim that total." 

Sustainability is also important in the affordable space, Sauder said. In the case of Wakeland, that is because the company will own the housing for a long time and wants the lower cost of operation.

Demand For Multifamily Is High In San Diego, Yet It's a Challenge To Develop More

Title 24 is driving a lot of decision-making in new apartment development in California, LaFever said. Greystar, a development and investment specialist, has developed about 1,500 apartment units in San Diego.

"A lot of the compliance is behind the walls, so it isn't something you can show residents easily," LaFever said.

Still, residents want more sustainable features, and it behooves developers and owners to make sure residents understand the green features of their buildings.

Capturing data is more important than ever, to help buildings be managed more efficiently, said Verdani Partners founder and President Daniele Horton, whose company manages sustainability for more than 2,600 properties, including a large number of multifamily properties. Fortunately, master meters and other technology suited to tracking building operations are more available than ever.

"More efficient buildings are more valuable," she said. 

Residents are more attuned to sustainable amenities now, and in some cases are willing to pay more for them, Horton said.

"Of course many people want to live in walkable urban areas. Beyond that, there's huge demand for features such as smart thermostats, car-sharing, electric vehicle charging stations and vegetable gardens."

Robin Wilson Interior Design design principal Robin Wilson said apartment design has changed quite a lot in recent years.

"The thinking has changed for both unit design and common areas," she said.

Flexibility is the key to design now.

"Residents want flexibility in the way units are used. They need space from which to work from home, different kinds of storage, and are willing to accept smaller units in urban developments."

As for amenity spaces, the distinctions between them are blurring, Wilson said. Open spaces that can be used in a number of ways are popular now.

"Everything is more open and social, even the business center," she said. "And spaces can be transformed into what the residents need or want — a conference area, private dining, a poker room or a place to simply hang out."

Demand For Multifamily Is High In San Diego, Yet It's a Challenge To Develop More
MG Properties CEO Mark Gleiberman, Meridian Capital Group Managing Director Seth Grossman, TruAmerica Senior Managing Director Greg Campbell and McKinney Capital & Advisory Senior Adviser Peter Quinn, who moderated

MG Properties CEO Mark Gleiberman said even though there is some concern that the market is peaking, and a few lenders are a bit skittish about lending in the multifamily space, interest in multifamily is now as strong as it has ever been.

"The challenge isn't finding capital," he said. "The challenge is finding deals to invest in."

There has been an increase in development, but it has not been enough to meet the demand in most of the markets where his company is active — largely in suburban and secondary markets, Gleiberman said. 

TruAmerica Senior Managing Director Greg Campbell said there is more capital than deals right now.

"It's a competitive environment, with cap rates low, and rates for debt still favorable to multifamily development."

Because the hunt for Class-A apartments in markets like San Diego is so intense, a lot of former Class-A investors are now focusing on Class-B.

"We see 15 to 20 offers on the first round of value-add, Class-B deals," Campbell said.

"Institutional investors are looking for value-add more than ever," Meridian Capital Group Managing Director Seth Grossman said.

Thus there is growing competition for that kind of property, with the spread between value-add and core-plus valuation narrowing.

"There's definitely more money in the multifamily space than opportunities now," Grossman said.