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No End in Sight to San Diego’s Run of Strong Apartment Demand

By Joshua Ohl CoStar Analytics February 19, 2021 | 2:19 P.M.

Demand for San Diego apartments remains elevated during the first quarter, relative to recent history. Through the middle of February, demand — as measured by change in occupancy — is already approaching average levels recorded between 2017 and 2020. The pace of net absorption — the difference between move-ins and move-outs — has cooled off from the torrid second half of 2020, when demand reached its highest level on record. The first quarter of 2021 is on pace to beat nearly every first quarter in the past decade. January demand alone doubled the average single-month levels for January, going back to 2017.

The strength of recent demand for the San Diego multifamily market has led to the overall vacancy rate falling to the lowest level in five years, at 4.1%. That’s down more than 1% over the past year.

The stabilized vacancy rate, which includes newer communities that have reached 90% occupancy and those built more than 18 months ago, has fallen to 3.5%. That’s down roughly 90 basis points in the past 12 months, reaching its lowest level in a decade. While demand is still positive in downtown San Diego, it is one of the few areas of the region where demand has fallen off from its historical average. Last year fell short of the trailing three-year average by more than 100 units, and the first quarter is on pace to fall similarly short of first-quarter averages.

There has been a notable drop in the stabilized occupancy rate in the downtown submarket since the start of 2020, falling by more than 2% in the past 12 months. The decline coincided with the pandemic, as many renters shifted to the suburbs and away from dense urban living. Not only does that allow for renters to spread out, but the average one-bedroom rental in the suburbs offers an average monthly discount of more than $700.

Other submarkets in San Diego have already either exceeded their first-quarter average between 2017 and 2020, or are on pace to easily do so over the next six weeks. The North Shore Cities, North County, South Interstate 15 Corridor and East County submarkets have each already exceeded the average first quarter demand from 2017 to 2020, while the Balboa Park neighborhoods and Mission Valley are on pace to easily exceed trailing averages. Other San Diego submarkets, including Coronado/Point Loma and University Town Center, are projected to match their respective averages.

Demand has cooled off during the first quarter in the Chula Vista and National City/South Central submarkets. Last year, net absorption reached a decade high in Chula Vista, while the vacancy rate fell 200 basis points to below 4%. National City’s demand reached a three-year high last year, contracting the vacancy rate to less than 2.6% in the process and hitting the lowest rate there in 20 years. Both areas are reporting almost full occupancy.

The region’s tight for-sale housing market is an important factor in apartment demand remaining scorching. Even with interest rates at record lows, the for-sale inventory is about half of what is considered necessary to keep up with demand in the region. That locks many residents into rentals, even with record high average monthly rents close to $1,900 per month.

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