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Multifamily Investors Drawn To San Diego's Strong Fundamentals

Nearly half (49.3%) of San Diego’s 3.2 million residents live in rental housing according to a new JLL multifamily report, which noted the average rent is $1,627/month and apartment occupancy is 97.6%. San Diego is one of the hottest apartment sales markets in the nation, with $2.6B in transactions last year, due to its strong multifamily fundamentals.


Bisnow caught up with JLL San Diego EVP Darcy Miramontes (pictured with her dog, Dash), who specializes in multifamily transactions, to learn why San Diego is a magnet for investors even as values escalate. She tells us multifamily investors are attracted by SD’s strong economics and constraints on new development.

Job and population growth, along with the high cost of homeownership, is keeping apartment demand strong, Darcy notes. San Diego added 32,200 jobs over the last year, and the city’s unemployment rate dropped to 4.2% in May 2016—below the threshold most economists consider full employment, according to the latest report from the California Employment Development Department. Over the previous three years, SD added 68,000 jobs.

Pictured below are the Seta apartments in La Mesa, which sold earlier this year for $70.3M.


With the second-fastest-growing economy in California at 3.6% annually since 2014, San Diego’s primary economic drivers—technology and life sciences, healthcare, defense/military and tourism—are expected to continue to expand and drive the region’s growth. SD also is a hotbed for tech and life sciences/biomed startups, with local entrepreneurs attracting $1.6B in venture capital in 2015 alone. There were 114,000 high-tech jobs, paying on average $98,934 in 2015, according to the JLL report, and the region’s life sciences cluster is the fourth-largest in the US.

Cited as one of the nation’s four “smartest cities” by National Geographic, San Diego has one of the most educated populations in the nation; nearly 35.3% of adults ages 25 to 34 have a bachelor’s degree or higher compared to 31% nationally, and 13% of San Diegans 25 or older have master's or doctorate degrees, compared to 11% nationally. Of all San Diegans with degrees, 40% are in engineering or science.


The 16th-fastest-growing US city, San Diego's population is growing at a rate of 1.1% annually. One reason for the rapid growth is the influx of Millennials between 2000 and 2012 (the SD Economic Development Corp reported 72,000), according to a study by Impress Inc economist Joe Cartright. The study found the city’s pool of highly educated 25- to 34-year-olds grew by 43% during that period, compared to an average of 25% in the top 51 metropolitan areas.

San Diego was second only to Austin for "best places to live" in the US in a survey of Millennials by WalletHub. Millennials comprise 27% of the city's population, compared to 17% nationally and about one-third of Downtown SD’s population of 35,000.

Pictured above are Gables Summerset apartments in Mira Mesa. IMT Residential acquired the property, renamed IMT Sorrento Valley, for $214M.


Pictured above is Form 15 in Downtown San Diego, which sold to Essex Property Corp in 2016 for $97.4M.

Darcy also points out SD’s natural barriers—the Pacific Ocean, Camp Pendleton, mountains and the Mexico border—limit new development, driving up existing property values. “There are fewer core deals, and return margins on core deals are very thin, so we’re seeing a lot of activity on the value-add side, as well as in development space.” Most new development is infill or in outlying areas of the county, and “opportunities are hard to come by,” she says, noting the high cost of land is boosting values $100k to $150k/unit for the land and even more—up to $200k—for high-end land pricing in Del Mar UTC and Mission Bay.

The top five sales so far in 2016 are:

  • Seta, La Mesa, 198 units, $70.3M ($355k/unit);
  • Gables Summerset (renamed IMT Sorrento Valley), Mira Mesa, 752 units, $214M ($284,600/unit);
  • Form 15, Downtown, 241 units, $97.4M ($404,100/unit);
  • eaves Rancho San Diego, Rancho San Diego, 676 units, $158M ($233,700/unit); and
  • Heatherwood Garden, La Mesa, 155 units, $39.9M ($258k/unit).

Pictured above are eaves Rancho San Diego apartments in Rancho San Diego, which sold for $158M.

The JLL report noted cap rate spreads over the Treasury rate have started to contract, falling to 2.63% in San Diego at the end of 2015, after peaking at 4.45% in 2012. At current market cap rates, every five basis point increase in cap represents a 1% loss of property value. Rising rents, however, continue to fuel the apartment sales market.

While San Diego’s rent growth has lagged San Francisco and LA in the past few years, Darcy says research analysts are predicting better rent growth in SD than other Southern California cities. The USC Lusk Center for Real Estate’s Casden Multifamily Forecast is predicting a 2.9% rent increase for San Diego in 2016, and suggests rents will continue to rise over the next few years due to lack of new supply to meet increasing demand, population growth and a growing economy.


Darcy, who works with international groups, notes traditionally San Diego had been too small of a metro market to attract big, aggressive international investors, but “not anymore.” She says when JMI Realty was marketing Parcel C in the Ballpark District, which went to Greystar Realty Partners in a JV deal with JMI to develop Ballpark Village (pictured above), the size of the transaction drew significant international attention from both Asian and Canadian investors, one of which came close to winning the deal.