Market Snapshots – September 2018

Carrie Rossenfeld Market Snapshots

Excerpts from industry reports from SoCal Real Estate’s September 2018 issue:

Marcus & Millichap’s Q2 Multifamily Research Market Report for San Diego and Orange County

In San Diego, employers added an average of 32,000 positions annually during the past five years, attracting thousands of new residents. Many of these transplants have been young professionals, as the county’s 20-to-34-year-old cohort has grown by 6,800 people on average since 2013.

A rise in household formations is increasing demand for available apartments, while home prices remain out of reach for most. Responding to an extended span of sub-4 percent vacancy, developers have completed more than 5,000 units this year, the largest annual total in the past two cycles.

New residents have been presented with limited options. Single-family home prices continue to escalate at a faster pace than rents, rising by more than 9 percent over the past year. Despite median household income increasing to $74,000 annually, many households are unable to afford the county’s median-priced home of $633,000, in the first quarter. This barrier to homeownership maintains strong apartment demand this year, supporting another period of 5-percent-plus rent growth.

In Orange County, unemployment has sunk to just above 3 percent. Household formation has provided consistent rental households to the metro, particularly due to the elevated prices for single-family homes. Countywide vacancy has remained under 5 percent annually since 2011, even as deliveries have averaged roughly 4,000 units over the past three years. This year’s supply will skew primarily toward locations in Irvine and Huntington Beach. A lack of alternatives among tenants in these markets will prompt outsized rent growth over the coming year.

Deliveries between the beach and I-5 provide fertile ground for rent growth. Builders will finalize roughly 4,350 new apartments this year, with sites ranging from the coast to I-5. Strong employment growth in professional employment will buoy luxury demand in these areas, particularly in Irvine and Costa Mesa. A collection of modern amenities at the new units will promote considerable absorption, although modest upticks in vacancy will occur as the properties lease up.

CBRE’s GLA/OC Marketflash

Strong online purchasing trends throughout the Southern California region over the last eight years made it necessary for large e-commerce related users to store a significant amount of product. E-commerce not only changed how consumers shop, but also how developers build new warehouse facilities.

The shift to larger warehouse dimensions with taller clear heights resulted in an increase in capacity potential. Supply-chain complexities also created the need for extra space to accommodate multiple processes in one facility.

The rise of e-commerce led to the development of taller warehouse facilities to accommodate more goods stocked there rather than retail stores. Developers pushed the limits of clear heights to meet the need for more space, which bolstered strong rental growth in the second half of the current cycle and offset the increased construction costs from these enhanced facilities.

The popularity of taller clear heights resulted in a significant shift in occupancy gains and construction completions in the second half of the current cycle. The difference in the new product is that developers built up rather than out, providing greater vertical capacity, but building beyond the 42-foot clear height is unlikely at this point. Developers would need to consider multi-storied warehouses, and currently the cost outweighs the potential benefits.

Cushman & Wakefield’s San Diego Population Report

The working-age group (20-64 years old) makes up 62 percent of San Diego’s market’s population, the historic high for the region. San Diego’s population grew 0.7 percent in 2017, slightly below the 15-year annual average growth rate of 0.9 percent. The market San Diego has one of the highest concentrations of breweries in the country, with 38.4 breweries per capita (per one million people) compared to 16.7 nationwide. And the beach is a part of daily life with 75% of the population living within 10 miles of the coast.

According to Jolanta Campion, Cushman & Wakefield’s director of research in San Diego, “What was very interesting about the findings in our report was that 56 percent of the 3.4 million people living in San Diego are 39 years or younger. Furthermore, millennials are the largest generation group in San Diego, representing over 31% of the total population. Based on this calculation, San Diego currently ranks as second in the U.S. as having the highest concentration of millennials compared to the total population living in the metro area.”

She adds, “The millennial population has and will continue to affect how we use commercial real estate, namely office space, with sub-product types such as creative office and co-working — which combine for a total of 4 million square feet of space countywide — leading the way.”

Jolanta Campion, Cushman & Wakefield’s research director in San Diego. | Courtesy a representative of Cushman & Wakefield