According to a recent report released by a representative of JLL, San Diego continues to produce insufficient levels of new housing to meet market demand. The report says the supply-constrained nature of the market has resulted in limited multifamily investment opportunities and low transaction volume, especially for class-A assets.
SoCal Real Estate spoke with Darcy Miramontes, SVP at JLL, about the factors preventing apartment development in San Diego, how the market can overcome this problem, hope from opportunity zones, and the region’s acceptance of density.
SoCal Real Estate: What’s curtailing needed apartment development in San Diego?
Miramontes:First, I’d say general geographic boundaries: we have Camp Pendleton to the north, the Pacific Ocean to the west, the mountains to the east, and Mexico to the south. Even L.A. continues to grow east, where there are not a lot of barriers to entry, but there are a lot in San Diego
Second, there is considerable difficulty in processing entitlements for new housing in San Diego — both for multifamily and for single-family housing. There’s difficulty in navigating the entitlement process within the different municipalities in San Diego.
There a lot of developer hurdles. Soft costs and hard costs have both gone up. It has to do with market dynamics: hard costs are up 15 percent since January, and landowners and municipalities are demanding high prices, and both are not being factored into those hard costs.
The approval process within some municipalities, as well as the political activity by some of the local community groups, can really stall out development. That’s not to say that developers shouldn’t make concessions and build product that fits in the community — One Paseo is one example — but it shouldn’t be a 10-year battle like One Paseo.
Margins are very narrow at this point in the cycle, and we’ve seen at this point some developers choosing to sit on their land or walking away from development because the financial metrics don’t make sense.
What’s the most expedient way for San Diego to overcome this problem?
There’s hope that construction costs won’t continue to rise but either level off or tread backwards instead, but that’s not on the horizon for the foreseeable future. It would be nice if cities would work more closely with developers to develop an end product that both are happy with rather than months of legal entanglement. Almost every major development hits political headwinds, and it hurts development in neighborhoods that could really use it.
Is there hope with opportunity zones?
Opportunity zones are the hot new thing to look at in terms of development, and we have seen some action on potential projects in San Diego’s opportunity zones. This is great as it will spur some more development, hopefully in underserved areas. It will help spur more workforce housing product — not high-end luxury but workforce housing product that serves bigger communities. This type of development will only be able to be done on opportunity-zone projects because costs for the developer will be lower.
Developers have been building to high-end, luxury specs because that’s the only type that makes sense. There’s been an emphasis by Civic San Diego on high-rise development. The combination of high land prices and construction costs forces builders to build high-end product in order for it to make financial sense.
Is San Diego becoming more accepting of density as the housing crisis continues to worsen?
No — with the exception that Civic San Diego has been pushing for more density Downtown, which is great. Sometimes landowner pricing sticks, pushing density, but landlords haven’t adjusted their pricing and are forced to build to high-end. I think it’s good, but I haven’t seen it elsewhere in the county. Many of the most recent project approvals have needed to scale down density to get approval.