From SoCal Real Estate’s November 2018 issue:
Excerpts from industry reports
Marcus & Millichap’s Q3 Multifamily Research Market Reports
In the past five years, San Diego’s expanding population of millennial residents has translated into a growing pool of renters as home prices remained out of reach and appreciated faster than apartment rents. The high propensity to lease on the part of this age cohort has the metro’s vacancy rate at its lowest point this cycle as of midyear. While local unemployment sits at a historically low level, diverse job growth is slated to continue through the remainder of this year, led by the biotech, life-sciences, and health sectors. This hiring suggests employers recruit from outside the county with increased frequency, supporting positive net migration and robust demand for the metro’s limited number of vacant units.
Apartment development in San Diego temporarily mellowed during Q3 as several waves of new supply lined up. For the second time this cycle, annual delivery volume surpasses 4,000 units, yet just one-third of this supply is slated for completion during the next six months. The brief lull in new supply bodes well for submarkets with recently delivered projects currently in lease-up. Downtown San Diego is a prime example: 1,500 high-end apartments were added to the rental stock over the past year, yet only 325 new rentals will come online during the second half. The submarket has already demonstrated an ability to absorb new units, and the short-term dip in deliveries should allow vacancy to further tighten.
In Orange County, unemployment fell sharply as economic growth remained robust. Spurred by sharp gains in healthcare and professional and business-services employment, Orange County job growth remained on stable footing, generating robust household formation. Due to high home prices and the large down payments required to purchase a single-family home, the vast majority of housing demand in this market has been driven toward local apartments, where vacancy remains historically tight. While new construction has created pockets of temporary rises in vacancy, rent appreciation remains elevated, particularly in the popular beach communities near employment centers in Newport Beach, California. These conditions will result in another year of healthy rent appreciation, driven by class-A and -C units.
Huntington Beach, California, and Irvine, California, developments underpinned a slowing multifamily pipeline in Orange County during the third quarter. After receiving the largest number of annual completions of the current cycle in 2017, development will slow through the remainder of 2018. Completions will be led by offerings in Huntington Beach and Irvine, with smaller concentrations in Anaheim. Locations outside of the beach communities skew toward neighborhoods just off I-5, providing convenient access for commuter residents. Softening vacancy will likely occur as new supply comes online, particularly where new units are concentrated, yet higher rental rates will boost NOIs as the year progresses.
Meanwhile, in the Inland Empire, population expansion and tight vacancy met with limited development. An extended span of robust job growth had the Inland Empire’s unemployment rate nearing 4 percent entering the second half of the year. Yet, a diverse group of organizations continue to bolster payrolls this year, ranking the metro as one of the top locales nationally for hiring velocity. Many companies that are expanding payrolls operate in sectors that historically produce renters, which bodes well for local apartment demand amid a period of cycle-low vacancy and minimal near-term deliveries. Apart from three projects in Riverside County, a dearth of new supply is slated for the remainder of this year, notably heightening renter demand in San Bernardino County. Overall, the metro’s ability to maintain cycle-low vacancy translates to an annual rate of rent growth that leads most Southern California markets.
Also in the IE, a shift in apartment development is nearing. Annual delivery volume holds below the 1,000-unit mark, fueling demand for a wave of further-off completions. As of July, developers were underway on at least 2,900 apartments slated for 2019 finalization. Of note, more than 1,700 of these rentals were underway in San Bernardino County, a region where developers have slowly responded to swelling demand for new units. Of the projects scheduled for next-year delivery in the metro, the average unit count is 240 apartments, reflecting developers’ confidence that a large-scale demand exists for luxury product.
Atlas Hospitality Group’s 2018 Midyear California Hotel Sales Survey
California saw a 35 percent drop in the number of hotels sold through the first six months of 2018. There were 134 individual sales versus 206 in the same period of 2017. It was the third lowest total over the last 10 years.
The state’s total dollar volume declined 28 percent, while the median price per room went up over 11 percent. Only two major California submarkets saw an increase in the number of sales: Sacramento and San Francisco counties.
Sonoma County showed the largest decline, with no hotel sales through the first half of the year.