Apartment Rents Rise in San Diego, Boosting Prospects for the Spring

Apartment Rents Rise in San Diego, Boosting Prospects for the Spring

Rents Finally Reverse Course in University Town Center

By Joshua Ohl
CoStar Analytics

March 7, 2024 | 9:04 A.M.

It may be too early to say that San Diego's worst rent losses are in the rearview mirror, but February marked the second straight month of rent gains in the California city’s apartment market, overcoming a widespread downturn that rippled across the region in the second half of 2023.

Apartment rents grew 0.3% in February and are up 0.5% in 2024 through February. Although that's below the first-quarter pace between 2015 and 2019, when apartment rent growth averaged 1.4%, it’s a welcome respite for area landlords who saw rents drop 2.2% between July and December of 2023.

There may be some momentum heading into the spring leasing, a season that typically sees San Diego's best quarterly rent growth. Between 2015 and 2019, the metric averaged a healthy 1.8%.

Local property managers have mentioned that rent growth has lagged behind historical performance in recent months due to increased competition to secure new renter households. That environment of lighter demand inhibits aggressive rent raises.

Lease tradeouts, however, are still seeing declining effective rents due to the widespread concessions used in nearly one-third of properties surveyed by CoStar Research in February.

Once again, growth in the region’s naturally occurring affordable housing trailed other residential typologies, with rents rising 0.2% in February. The luxury sector, facing supply-side pressure and competing lease ups, saw rents rise 0.3%, while midtier properties saw asking monthly rents grow 0.4%.

At the neighborhood level, rents fluctuated. Perhaps most notably, University Town Center's average rents rose by 0.8% in February, ending an eight-month slide that saw rents tumble 7.7%. Rents rose 0.5% downtown during February, bringing the average asking rent to nearly $3,000 per month.

In Chula Vista, where more than 800 market-rate apartments opened at the end of 2023, rents were up 0.8% in February to an average of $2,350 per month. However, rents in neighborhoods along the Interstate 15 South Corridor surged 1.6% in February to an average of nearly $2,950.

Further north along that corridor in Escondido and San Marcos, rents were down 0.4% in February to an average of about $2,340 per month. In Mission Valley — which has one of its densest pipelines in the past five years with more than 2,000 market-rate units under construction — rents dropped 0.5%.

Although the region still has some rent-loss recovery to do, landlords are hopeful that the upcoming spring leasing season has shifted momentum. Managers expect that concessions will begin easing in the coming months, which should lead to effective rents rising once again.

Southern California Home Price Surge Outpaces Rent Growth

Southern California Home Price Surge Outpaces Rent Growth

Homeownership Is a Negligible Risk to Apartment Demand

By Jesse Gundersheim
CoStar Analytics

March 6, 2024 | 11:49 AM

Southern California led U.S. home price growth in 2023, according to the Case-Shiller Index. An 8.3% increase in the Los Angeles - Orange County area was only topped in the 20-City composite index by an 8.8% rise in San Diego, while the U.S. national index increased by 5.5%. Home prices in Los Angeles are now 4.3 times higher than in 2000, vastly outpacing a less than twofold increase in apartment rents over the same period. Coupled with higher interest rates, rapid home price escalation in Southern California has opened a wide gap in the financial burdens between owning and renting.

Considering rents for Class A, 3-bedroom apartments in Orange County run approximately $4,500 per month and cost over $5,000 in Los Angeles County on average, residents theoretically capped at those expense limits are only afforded slim pickings in the purchase market. At prevailing 7.4% 30-year fixed loan rates available to high credit buyers, an equal monthly payment in Orange County supports purchasing a home or condo priced up to $720,000, generously assuming the buyer is paying a 20% downpayment of over $140,000.

Within that price range, fewer than 50 houses, townhouses and condos/co-ops with at least 3 bedrooms are listed for sale across Orange County on Homes.com. The majority of those offer smaller footprints compared to the 1,400 square foot average found among 3-bedroom apartments, which typically come with a bevy of high-end amenities, not to mention upkeep.

Removing bedroom minimums, fewer than 300 homes are listed for sale in Orange County between $500,000 and $750,000, and another 160 listings fall below $500,000. More commonly, homes sell for well over $1 million in the area. Among the nearly 2,200 for-sale listings on Homes.com, excluding manufactured homes, 64% are above $1 million.

Apartment demand is not highly correlated with trends in homeownership historically, and as home prices soar even higher in Southern California, homeownership represents a nominal threat to apartment investors. Even high-income renters of large luxury apartments in the area are seldom able to purchase a million-dollar home.

Nevertheless, those who gain the financial ability to enter homeownership will continue to chase the American Dream. Young couples progressing through life will seek additional space and safe neighborhoods to raise families. Moreover, buyers will continue to pay higher monthly costs to reap the financial rewards of rising home prices, enticed by the massive equity gains that continue to flow to Southern California homeowners.

San Diego’s Apartment Construction Steady in First Quarter

San Diego’s Apartment Construction Steady in First Quarter

Builders Focus on Downtown, Mission Valley and Balboa Park

By Joshua Ohl
CoStar Analytics

February 29, 2024 | 7:35 AM

Construction levels in San Diego’s apartment market have remained stable despite rising construction costs, elevated interest rates, sluggish demand and moderating rent growth.

More than 8,400 market-rate apartment units are under construction across the region, almost identical to the quarterly average of units in the pipeline over the past three years.

The heaviest pockets for construction activity in San Diego will sound familiar. Downtown San Diego leads the region with nearly 2,500 units, or 16% of existing inventory, under construction. That’s right in line with the five-year average.

Several projects, including Holland Partner Group’s West project, are scheduled to open this year, which could push vacancy above 10% for the first time since 2020. The 431-unit West property is part of a mixed-use development that includes 290,000 square feet of office space. The price tag has swelled from $400 million to about $470 million due to escalating labor and material costs coupled with higher interest rates, according to the developer.

In Mission Valley, more than 2,000 market-rate units are under construction. That’s 30% more units in the pipeline than the five-year average, representing nearly 8% of inventory. Trammell Crow is building the 531-unit Alexan Camellia on a former Dixieline Lumber site demolished at the end of 2022. It is tentatively scheduled to open at the end of 2024 and represents an increasingly common approach by builders to redevelop vacant retail sites.

Balboa Park has become a focal point for developers over the past several years. More than 900 units are under construction, accounting for 3% of existing inventory, and thousands of parcels in these inner ring neighborhoods have been up-zoned to accommodate more housing. A proposal for Hillcrest, for instance, envisions high-rise towers along several transportation arteries and would more than double density in some locations. Many of these corridors are part of the City of San Diego’s Complete Communities initiative.

Most of the properties that are built here are comprised of studios and one-bedrooms. The average unit built in these neighborhoods since 2020 measures more than 100 square feet smaller than what has been built across the balance of San Diego during that period. Local developers have discussed that they can build smaller units here for under $500,000 per unit. Yet while elevated interest rates have increased the cost to build a unit by about $5,000, rising construction prices can increase the development costs by upwards of $50,000 per unit.

Only about 3,000 market-rate units are scheduled to open in San Diego this year. The past two years saw an average of 4,000 open, and new supply outpaced demand each year. Although supply additions are expected to outpace demand again this year, the delta is expected to be much narrower.

Healthpeak Sells Majority Stake in Biotech Property in High-Demand San Diego Enclave

Healthpeak Sells Majority Stake in Biotech Property in High-Demand San Diego Enclave

Deal With Breakthrough Properties Values Campus at $236 Million

The Callan Ridge life science campus in San Diego is fully leased to Turning Point Therapeutics, a subsidiary of Bristol Myers Squibb. (CoStar)

By Lou Hirsh
CoStar News

January 11, 2024 | 1:28 P.M.

Real estate investment trust Healthpeak Properties sold a 65% stake in a newly built San Diego life science campus in a deal that values the entire campus at $236 million, making it among the region’s largest office deals of the past year. 

Denver-based Healthpeak, among the nation’s largest holders of biotech and medical offices, said it sold the majority stake in its Callan Ridge office and lab campus to Los Angeles-based investment firm Breakthrough Properties as part of a new joint-venture arrangement. 

The two-building, three-story Callan Ridge campus spans about 185,000 square feet and was developed by Healthpeak in the Torrey Pines neighborhood of coastal La Jolla, the San Diego region’s largest biotech hub and among the nation's biggest. The property’s construction began in 2021 and it is nearing completion at 3020-3030 Callan Road. 

The campus is fully leased to Turning Point Therapeutics, a subsidiary of Bristol Myers Squibb, thought April 2035. Healthpeak officials said Turning Point began leasing 105,000 square feet at the Callan Ridge campus in July 2023, and it has a lease in place to occupy the remaining 80,000 square feet starting in July 2024. 

A Healthpeak statement said the REIT will receive net proceeds of approximately $130 million after factoring in the company’s remaining share of tenant improvement costs. The deal values the property at about $1,275 per square foot, making it among the San Diego region’s largest office transactions of the past year by total and per-square-foot price, based on CoStar and public data. 

“The strong pricing highlights the underlying demand for our lab assets and allows us to recapture our initial invested capital, while still retaining a 35% interest in the trophy campus,” Healthpeak CEO Scott Brinker said in a statement. 

High-End Property Demand

Breakthrough Properties Chief Investment Officer Daniel D’Orazi said in a statement that the deal for Callan Ridge provided the company “with a unique opportunity to acquire a newly-developed trophy-quality research campus in the heart of Torrey Pines, where Class A assets rarely become available.” 

U.S. biotech real estate deals leveled off during the past year as many small- and medium-sized companies pulled back on space with demand waning for coronavirus-related vaccines and treatments. But industry analysts and developers have said demand generally remains strong, especially among larger global pharmaceutical firms, which continue to add space in major life science hubs including Boston, San Francisco and San Diego. 

Nationwide demand is expected to remain steady in the long term as companies increase space requirements in growing research areas such as cancer, dementia, diabetes and obesity, according to brokers and industry analysts. 

Breakthrough Properties is a joint venture of global office developer Tishman Speyer of New York and biotech investment firm Bellco Capital of Los Angeles. The venture was formed in 2019 and now oversees a nationwide biotech property portfolio spanning more than 5 million square feet. 

Breakthrough owns two other biotech properties in the Torrey Pines area including the 10-acre Torrey View campus, which is under construction and slated to be occupied by tenants including medical device maker Becton, Dickinson and Co.

Healthpeak Properties oversees a nationwide portfolio of biotech and medical office properties spanning more than 50 million square feet and valued at more than $20 billion, according to company statements.

San Diego Apartment Sale Ranks Among Region’s Priciest of Past Year

San Diego Apartment Sale Ranks Among Region’s Priciest of Past Year

Deal for Property Near High-Profile Mall Tops $200 Million

A Salt Lake City investment firm acquired the 300-unit Palisade apartment property, located next to San Diego's Westfield UTC mall. (CoStar)

By Lou Hirsh
CoStar News

January 4, 2024 | 7:16 P.M.

A San Diego apartment sale topping $200 million near a popular regional mall may be the region’s priciest multifamily deal of the past year and among the largest in California, as buyers find opportunities to acquire well located properties at prices below the cost of new construction.

Investment firm Property Reserve Inc. of Salt Lake City acquired the 300-unit Palisade apartment property, built in 2019 at 8800 Lombard Place in San Diego’s University Town Center neighborhood, for about $203 million or $677,000 per unit, according to CoStar data and county public filings.

The seller was New York-based JP Morgan Chase, which paid $119 million in October 2021 to buy out its original joint venture partner, mall operator Unibail-Rodamco-Westfield, in a deal that valued the full property at $238 million. URW developed the upscale Palisade apartment building on a parcel that was formerly part of its Westfield UTC mall, and subsequently sold a 50% stake in the apartment property to JP Morgan.

CoStar data as of Jan. 3 showed the sale of Palisade was the San Diego region’s largest apartment deal of the past year by total price and also the biggest deal for any commercial property type. It is also the region’s fourth-largest apartment deal of the past five years by total price, and the third-largest multifamily deal of the past year in California.

CoStar data showed the per-unit price paid for Palisade was well above the average $503,000 for UTC apartment properties and $399,000 average for the San Diego region during the past 12 months. But like other recent big deals in San Diego and California, the total price is below what it would cost to build those properties in the current economic climate in the same neighborhood, said Joshua Ohl, senior director of market analytics for CoStar Group in San Diego.

“There are few buildings as well situated in the region as Palisade, and the sale shows that buyers are still interested in core assets in San Diego at high prices, particularly for one located in UTC at the Westfield mall, which may be one of the top retail and experiential destinations in the region,” Ohl said.

URW said in a 2021 statement that the sale of its half-stake in Palisade to JP Morgan reflected a 15% premium to the property’s latest appraisal at that time, “signaling the relative premium of residential and commercial buildings in close proximity to URW’s flagship assets and the value of densification projects in these locations.”

URW’s development of Palisade in 2019 followed its completion during the prior decade of more than $1 billion in expansions and improvements to the Westfield UTC mall, which was originally built in 1977. The mall operator is among several that have added apartments and other mixed-use components to existing retail centers.

Paris-based URW during the past three years has sold off several of its U.S. mall and other adjacent properties as part of plans to focus operations in Europe and other regions, though Westfield UTC has so far not been sold.

CoStar Market Analytics data showed the San Diego area that includes University Town Center and the adjacent village of La Jolla posted $553 million in apartment property sales during the past 12 months, up 205% from the prior year and by far the biggest tally for any San Diego neighborhood. The UTC-La Jolla area also has among San Diego’s highest average monthly rents at $3,154, even after rents declined 3.5% over the past year.

Another big San Diego deal that closed in late December involved the 265-unit property known as The Artisan, built in 2018 at 1601 Broadway in downtown’s East Village neighborhood. Purchased by San Francisco-based Jackson Square Properties from Scottsdale, Arizona-based Alliance Residential for about $107.8 million or $407,000 per unit, it was San Diego’s sixth-biggest multifamily sale of the past year by total price, according to CoStar and public data.

“The Broadway deal sold for below replacement cost for relatively new construction that may not need any renovations in the near term,” Ohl said. “Similar to the UTC transaction, core assets in the region continue to attract investors.”

The buyer and seller in the latest deal for Palisade in UTC did not immediately respond to requests from CoStar News to comment.

San Diego Apartment Sale Among Region’s Largest of Past Year

San Diego Apartment Sale Among Region’s Largest of Past Year

Property Trades for $125.5 Million Amid Slowdown in Deal Activity

Los Angeles-based investment firm Decron Properties acquired a 240-unit apartment complex in San Diego's Mission Valley neighborhood. (Decron Properties)

By Lou Hirsh
CoStar News

December 12, 2023 | 4:23 P.M.

A $125.5 million San Diego apartment sale is among the region’s largest of the past year by total price, though big deals remain rare with elevated interest rates.

Los Angeles-based investment firm Decron Properties said it bought the 240-unit Margo at The Society, built in 2021 at 201 Del Sol Drive in San Diego’s Mission Valley neighborhood. The seller was a private San Diego investor.

Decron officials said the acquisition was part of a 1031 exchange in which Decron sold two apartment properties in Thousand Oaks, California, near Los Angeles. IRS tax codes allow investors to swap one or more investment properties for another and defer capital gains taxes under certain conditions.

A Decron statement said the company has several other dispositions scheduled to close in the next few weeks, as it looks to make its California portfolio “younger and geographically more diverse while reducing the firm’s exposure to assets that are restricted by city or statewide rent control.”

The company said Margo at The Society is part of a San Diego mixed-use development that includes four multifamily complexes surrounded by a variety of hotel, retail, restaurant, transit and entertainment options, all within walking distance of the acquired property. Those include the 1.7 million-square-foot Fashion Valley Mall and several stops of the light-rail San Diego Trolley.

Decron officials said the company is looking to acquire 500 to 1,000 more apartment units in San Diego County over the course of the next 24 months.

“Unlike most markets in California, San Diego continues to experience remarkable growth, powered by a surging presence from the tech, healthcare and biotech industries establishing a growing presence in the area,” Decron CEO David Nagel said in the statement regarding the purchase of Margo at The Society. “The property’s stellar location, combined with the ongoing need for high-quality, multifamily assets to meet the demand of a growing population, made this an ideal opportunity for Decron.”

Mission Valley, in the geographic center of San Diego, is among the region’s most trafficked neighborhoods with several freeways and public transit routes passing through it. It also has among the region’s largest concentrations of retail centers, and during the past decade has been among its most active for development of apartments and single-family housing.

Construction and deal volume across the San Diego region has slowed in the past year amid high interest rates and other macroeconic factors, though the region has a tight apartment vacancy rate of 4.6% with rent growth of 1.2% in the past year, according to CoStar data as of Dec. 11.

The region posted $1.7 billion in apartment sales during the past 12 months, down 61.1% from the prior year. The deal for Margo at The Society in Mission Valley was the region’s fourth-largest apartment sale of the past year by total price, CoStar data showed.

“I’m not sure that it speaks to a revival in the local investment market,” said Joshua Ohl, senior director of market analytics for CoStar Group in San Diego, regarding the Mission Valley sale. “There are a great many market participants who expect investment activity to remain relatively subdued next year due to elevated interest rates, slowing rent growth and broader economic concerns.”

“But it does speak to the strength of core assets in premier locations in San Diego,” Ohl said. “That property is one of the newest in Mission Valley, and it is centrally located with great amenities, including a five-minute drive to the beach.”