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Landlords Brace for Apartment Rent Growth Capped at 7.2% in San Diego

CoStar Insight: New Law Takes Effect in San Diego on Jan. 1

California passed a statewide rent cap in 2019 that takes effect on Jan. 1. It caps rent growth at 5% plus inflation for buildings older than 15 years of age. Inflation was pegged at 2.2% for San Diego, retroactive to March 2019, setting 7.2% as the top annual rent growth that landlords can achieve for units on renewals in the region next year.

But how much impact will that level have on the rate of growth for communities across the metropolitan area?

Almost 90% of San Diego’s inventory falls under the scope of the new law. In the post-recession period, annual rent growth for market rate apartments across San Diego peaked in the third quarter of 2015 at 7%, just shy of the 7.2% of year one of the law.

Across submarkets, CoStar recorded peak annual growth between mid-2015 and mid-2016. Half of San Diego’s submarkets peaked above 7% since the recession, with La Jolla/UTC topping 13%.

Submarkets that have been the most heavily developed this economic cycle, Downtown and Mission Valley, are among the areas that peaked below 7%. Those submarkets are also impacted most heavily by concessions. While that new inventory is exempt from the rent cap law, the increased competition has largely kept rent growth of all inventory under control.

Looking into the forecast, CoStar anticipates that annual rent growth across the San Diego region will continue moderating. It is not expected, at the metropolitan level, to come close to approaching the rent cap over the next several years, likely remaining below 4%.

At the submarket level, rent growth is expected to moderate over the forecast for the majority of submarkets. However, CoStar forecasts Coronado/Point Loma, La Jolla/UTC and Outlying San Diego to approach the rent cap in 2020, before decelerating through the forecast.

While landlords may have to adjust their leasing strategies as they relate to rent growth, market- and submarket-wide rent growth is generally not expected to approach the new rent cap. As an economic consensus grows over an economic slowdown on the horizon, rent growth is largely anticipated to moderate along with the economy.

Article Via: CoStar : Joshua Ohl

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