By: Alan Nevin

As Published in The Daily Transcript, March 5, 2013

Most economic indicators in San Diego County are moving at an acceptable pace. Our population is growing. We gained 20,000 jobs in 2012 and it looks like we’ll do the same or better in 2013. Our sales tax revenue was up more than 7 percent (allowing our governments to function more smoothly) and car sales are booming. The only weak link is construction of for-sale housing. That’s still dragging along at 20 percent of the level of the early 2000s.

And then there are apartments. We have about 300,000 apartment units in the county, not much different than a decade ago. And 55 percent of households own and 45 percent of households rent. That’s nothing to be proud of, when in most of the nation 65 to 70 percent own homes, but it does result in the county having a robust and dependable rental market.

The apartment occupancy rate is about 95 percent. In the apartment business, 95 percent is considered full occupancy because you always have down time for turnover.

The demand side will continue to be on a rising path because of the jobs we are creating and the paucity of for-sale housing. Ordinarily, in times of a rising tide, San Diegans would be out scouting for new homes and condominiums. The problem is that we are building very few of those precious commodities. Further, the supply of new for-sale housing will not crank up again until 2015 when more new lots will be available to the development community, mostly in South County.

To add to the demand picture, our county has about half of its entire 180,000 unit condominium inventory and 20 percent of the 550,000 single-family homes in the rental pool. That situation results from the massive acquisition of property by investors from 2007 to 2010. The investors inevitably fixed up the units they acquired and rented them out.

Now, as prices accelerate (at the rate of 10 percent per annum), those investors are going to start taking their profits by selling those units to owner-occupants. And the renters will have to find somewhere else to live. Mathematically speaking, that is something on the order of 225,000 homes that fall into the investor-owned category. And let us say that in 2013, only 5 percent of those units come on the market, that is 11,000 renters who will be displaced.

Therefore, all the apartments in the county that are vacant would be rented with an overflow if that situation occurred. Even if my projections are off 25 to 50 percent (which they aren’t, I assure you), it is still a critical situation in the making.

Now let’s look at the apartment supply side: We are building apartments, lots of them. Our database shows more than 10,000 apartments in the pipeline (either under construction or soon to be).

About 3,400 or more of those apartments are in downtown San Diego and six of the 12 projects are already under construction. The two tallest are Pinnacle’s 500-unit 45-story monument in East Village and Leo Frey’s 20-story Ariel in Little Italy. Most of the rest are typically low-rise.

In the near-in suburbs, there are also a few monster projects in the works: Garden Communities is busily working on its 1,800-unit project at Interstate 15 and Mira Mesa Boulevard. Carmel Partners is now completing a 500-unit project on the old Uni High site across from the University of San Diego. Garden Communities is under way with a 300-unit project in Carmel Valley. And R&V Management has just completed a 280-unit project in Chula Vista (Rosina Vista).

Most of these market-rate projects have a cost well in excess of $200,000 per unit. Given the industry rule of thumb, the rent has to be 1.2 percent per month of the unit cost to make sense. Thus, the average rent in these units will be about $2,400. That’s still way below rents in San Francisco, New York and Washington, D.C., but it is still a big number and, of course, will be affordable only by the white-collar market, often doubling up to afford an apartment in a high quality location.

Now, the big question: Can an investor spend that much money on an apartment unit and still come out with a profit? Well, my friend Fred Schnaubelt has put an historical resale trend together for apartments in San Diego County. In 1970, the average unit sold for $11,428. By 1990, that figure had accelerated to $58,000. And then by 2012, the average sale price of an existing apartment unit was $149,698.

By way of a personal note, my old investor partner Marvin Karel and I accumulated about 1,000 units here in the latter 1970s. Our average cost was $23,000 a unit.

Long story short: San Diego remains a highly desirable place to own apartments. It’s a shame there aren’t many projects for sale. Owners know that the real money is to be made by hanging on for a long time, unless you want to play the trade-up game, but that’s another story for another day.

Nevin is a principal with The London Group Realty Advisors.