Rising SoCal Home Prices Keep Apartment Demand Robust

Carrie Rossenfeld Multifamily

Home-price appreciation in San Diego, Orange County, and the Inland Empire continues to ensure healthy demand for apartments in those markets, according to Q4 reports from Marcus & Millichap (M&M).

In San Diego, rising home values are forcing more residents into apartments, M&M reports. San Diego County entered the fourth quarter of 2018 with unemployment at a cycle-low level, suggesting employers will recruit from outside the metro with greater frequency when filling higher-paying openings moving forward, the firm predicts.

According to the report, for most households and individuals that relocate to the San Diego area, housing options will be limited, as the difference between a monthly mortgage payment and average effective rent widened by more than $500 over the past 12 months to a difference of $1,724 per month. This broadening bodes well for future apartment demand and rent growth at a time when vacancy rests below 3 percent in more than half of the metro’s submarkets, M&M says.

The report also indicates that tight vacancy warrants a robust construction pipeline throughout San Diego. Developers are building nearly 7,900 rentals, yet units are concentrated in pockets, with Downtown San Diego serving as home to more than 40 percent of the pipeline including six high-rises that total 2,700 units, according to the firm. The bulk of other rentals being constructed are in Northeast San Diego, Chula Vista, and Carmel Valley. Another group of submarkets with sub-3 percent unit availability lack construction pipelines, suggesting their inventories of vacant units should further constrict in the coming quarters, M&M says.

In Orange County, the steady labor-market improvement has spurred a multi-decade low in unemployment, and housing prices are generating consistent rental demand, M&M reports. Underpinned by stable growth in professional and business services, IT, and healthcare sector hiring, accelerating wage gains are spurring the demand for housing, but due to high home prices and the commensurate down payments required to purchase a home, a considerable confluence of tenants will remain renters, the firm predicts. As a result, vacancy remains below 5 percent metro wide.

While OC submarkets undergoing significant apartment development have recorded slightly higher levels of vacancy, rent growth has remained robust, reaching the low- to mid-single digits annually in this market since 2011, M&M says. Locations near employment corridors such as Newport Beach and Irvine have undergone even more rapid appreciation, highlighting the long-term opportunity in Orange County multifamily assets.

OC construction through year end targets Huntington Beach and Irvine, M&M reports. Following the cyclical high-water mark reached in 2017, development totals for the year will fall nearly 20 percent as builders focus on class-A lifestyle communities. The firm says locations feature prime property near the ocean in Huntington Beach, while farther inland, completions in Irvine are between the I-405 and I-5 freeways, offering tenants quick access to the major transportation arteries in the county.

Similar to its neighboring markets, in the Inland Empire, home-price appreciation is outpacing rent growth, according to the report. The economic expansion of the Riverside–San Bernardino region over the past five years has been well documented, with the host of new positions enlarging the metro’s population at a robust pace, M&M says.

While job growth and strong net migration are primary drivers of rental absorption, another market condition has also bolstered demand for apartments in the IE, according to M&M: During the last three years, the difference between an average mortgage payment and average monthly rent has widened by nearly $300, with the affordability gap sitting at $634 per month entering the fourth quarter of 2018. The increasing cost of homeownership amid continued employment growth bodes well for apartment demand moving forward, generating a need for new units while also maintaining limited vacancy throughout the IE, the firm says.

The report also indicates that sizable apartment-development projects are on tap in the IE. Vacancy sits below 4 percent in nearly all submarkets entering the fourth quarter, warranting an influx of new supply, M&M says. While just two larger properties are finalized in the last three months of 2018, developers are slated to deliver nine complexes in 2019 that each comprise more than 200 units. Four of these projects are in the city of Riverside, with Moreno Valley, Redlands, and Chino Hills each welcoming two such developments, the firm says.