Are apartments good investments?

San Diego County market relatively healthy, spurred by returnees from Riverside, wariness to buy

 Written by Roger Showley

Nov. 15, 2011

Ocean Village apartments in Oceanside were one of the largest and most recent multifamily projects to change hands in the third quarter, CoStar Group reported. The sale price on the 33-unit project, including retail space, was $11.75 million. The project was originally built as condos but is expected to be handled as a rental for the time being, said the buyers, MG Property Group. — CoStar Group

San Diego County's apartment market is looking up for investors for next year, analysts say.

They point to rising demand, falling vacancies, higher rents and more projects in the pipeline.

"The apartment market is going to be very strong," said Russ Valone, president of MarketPointe Realty Advisors. "There's a lot of demand out there because people are shy about the for-sale marketplace today."

He said younger renters want to be flexible in case job prospects draw them away. Young families are interested in renting foreclosed houses and townhomes rather than buy as they normally would in their late-20s and early-30s. And former owners are settling into apartments.

Valone said some of the increasing demand derives from people who moved to Riverside and Imperial counties for affordable housing and commuted to work in San Diego. Many are renting back in the county to be closer to work.

"So you've seen a repatriation of a lot of households who had left the county for housing but continued to be employed in the county," he said.

Vacancies have not reached the low 2-3 percent range seen in the mid-2000s, since so many singles doubled up or moved back home with relatives. But the present vacancy rate of 4.5 percent is considered a healthy one, as measured in a survey in September of more than 117,800 units in 803 projects.

Economists generally say a 5 percent vacancy rate represents a desirable balance point between supply and demand.

Looking to supply trends, Valone said the number of apartment projects is likely to increase next year after a three-year slump. Only three projects with 185 units are under construction now but seven with 1,051 units have received their final go-ahead and 26 with 5,091 units have received tentative approval.

"We'll see increased supply in the marketplace," he said.

The Construction Industry Research Board in Burbank reported that through September, the number of multifamily units authorized locally was 2,329, more than double the 1,022 approved for the same period last year. That indicates many more new apartments are likely to be available in coming months.

By contrast, single-family homes were virtually unchanged for the same period, 1,744 in 2010 and 1,742 this year.

For existing owners, refinancing of their rental projects has loosened up with money available from Fannie Mae and Freddie Mac, the two government-sponsored enterprises that stumbled in the secondary for-sale market three years ago.

According to real estate attorney, Gordon Gerson, who advises clients seeking financing, both companies are on tap to complete more than $40 billion in multifamily financing and refinancing. Owners previously relied much more on commercial mortgage-backed securities offered by commercial lenders.

"This is a good thing because it means the capital markets have opened the gates of funding in the area of multifamily housing," Gerson said. 

Refinancing means owners can free up capital with lower rates and look for more investment opportunities. They also will not face the need to raise rates on tenants as much, since their cost of borrowing will be lower -- "all of which is good for the economy," he said.

Alejandro Lombrozo, a broker at Cushman & Wakefield, said institutional-grade deals, involving 100 or more units, have drawn many potential buyers. He cited one recent example, Woodbend Shadowridge, a 240-unit project in Vista, that sold for $44.3 million last month -- $185,000 per unit. 

"That had a lot of interest," Lombrozo said, "over 30 tours at the property and close to 20 offers."

He said 10 such sales are expected to close this year, about the same as last year and about what 2012 will bring. But he said things could slow down if interest rates rise significantly or Freddie Mac and Fannie Mae pull back on lending. 

But he said other lenders, particularly life insurance companies, are showing greater interest in San Diego apartments. 

For tenants, the current market has meant rising rents.

Valone said his latest survey showed that the average monthly rent surpassed the previous record, set in September 2008, to reach $1,364 in this past September survey. That represents a 1.3 percent increase since the March survey and 2.2 percent year-over-year. 

The highest rent was $1,719 in downtown San Diego, ahead of the submarket leader in the North County Coastal market, where the average was $1,697.

Gerson said rents are rising partly in reaction to the relatively better economy San Diego than in other markets. 

"As employment increases, you have an increase in rents," he said. But he said they are not rising as fast as in the San Francisco Bay area.

"Not only the Silicon Valley but in other suburbs of San Francisco are doing very well," he said.

Source: SignOnSanDiego