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Coming Supply Wave of Apartments Could Test Resiliency of Demand for New Luxury Units

Less Mid-Tier and Workforce Housing Under Development Provides Fewer Paths for Renters-By-Necessity

By Joshua Ohl CoStar Analytics

April 15, 2021 | 9:30 AM

San Diego had more apartment units under construction at the end of the first quarter of 2021 than at any other time in the past decade, reaching almost 9,000 units in development.

Of those units under construction, almost 95% were luxury units in four- or five-star properties. That ratio is slightly higher than in the past, when it was closer to 90%, but developers have encountered rising construction and land costs that make it prohibitive to build mid-tier product throughout much of the region.

That bifurcation of development has done little to provide new housing options for the region’s renters-by-necessity, who are often unable to afford upscale units and so are likely left with renting older units in the interior of the county. Those areas, such as El Cajon, Chula Vista and North County also have among the strongest annual rent growth, rents which are rising faster than income growth and the rate of inflation, placing further upward pressure on renters’ household incomes.

If there was initial concern that the pandemic would apply the brakes to breaking ground on new development, that was dispelled after more than 3,700 units broke ground in the San Diego apartment market during the four complete quarters amid the pandemic. That is equivalent to the trailing 12-month average over the past three years.

Many of the units being built among the luxury sector cost above $550,000 per unit. That was the case with The Merian, a Holland Partner Group development in downtown San Diego that delivered in mid-2020. The $275 million project consisted of 426 units at an estimated build cost of roughly $650,000 per door. And it has the rents to match. Average monthly rents are $3,700 per month, or more than $4.10 per square foot, and the average unit size there is 900 square feet.

Conversely, inventory rated two or three stars accounts for roughly 500 units currently under development, and they are spread out further from San Diego’s job nodes in the University of California San Diego area or downtown San Diego. National City, Chula Vista, Oceanside, Vista and Santee are among the cities that have mid-tier product currently under development. These units are often built for under $400,000 per door with much lower land costs and much fewer total units, averaging about 100 per project. At Vista Blue in Oceanside, the micro units will average 250 square feet and about $1,000 per month in rent.

More than 2,000 units are scheduled to deliver across San Diego in the second quarter, which will be one of the largest quarterly delivery schedules over the past five years.

Deliveries are about to mount in Mission Valley, which will certainly be a test of how resilient demand will be for that pocket of San Diego in the near term.

The first units of Holland Partner’s transit-oriented mega development Society Bradbury are scheduled to begin delivering in May. Tenants can get six to eight weeks of free rent for 13- to 16-month leases. Those concessions are high for the submarket, which typically falls closer to one month for new units. The $500 million development is being built at a cost of roughly $600,000 per door. With an average unit size of more than 1,000 square feet, average monthly rents are close to $3,100 per month.

Those units will likely coincide with Fairfield Residential’s Gravity, further east in Grantville, where concessions of one month free are being offered and renters are scheduled to begin moving in next month. Average rents are roughly $2,600 per month, or $2.85 per square foot, for units that average more than 900 square feet.

Several other communities in Mission Valley should be ready later in the year, although they’ve encountered delays along the way and likely won’t meet their initial delivery dates. Alexan Gallerie, Vive Lux and Dinerstein’s Witt Mission Valley are among those that have run into construction delays reportedly caused by labor shortages due to the pandemic.

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