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San Diegans Face Inflationary Pressure

Apartment Rents Still Rising at Historically High Level, but Not When Adjusted for Inflation

By Joshua Ohl CoStar Analytics May 10, 2022 | 11:55 AM

Inflation rose by 7.9% in San Diego over the past 12 months, according to the latest data from the Bureau of Labor Statistics’ Consumer Price Index. Although that level has fallen from the last reading in January, when inflation — measuring the decrease in the purchasing power of money reflected in a general increase in the prices of goods and services in an economy — was up 8.2% year over year, it provides little comfort to locals who are being squeezed by soaring consumer prices coupled with historically high rent growth in San Diego’s apartment sector.

While the recent mark is lower than the country’s average rate of inflation, San Diego had been trending at one of the highest rates of inflation in the United States ahead of March. On a year-over-year basis, the price of unleaded regular gas has risen 47.2% to more than $5.80 per gallon in San Diego, while grocery store staples including milk, fruits and vegetables, meats and eggs were up between 6.7% and 9.7%. When food and fuel are removed from the equation, the inflation rate is 5.6%.

The Federal Reserve’s policy-setting committee also boosted interest rates by 50 basis points at the start of May, the largest increase in 20 years. Its rate hikes in 2022 have made borrowing money more expensive as the Federal Reserve attempts to get inflation under control.

Those figures coincide with apartment rent growth in the region’s market-rate properties rising 13.5% in the past 12 months, to an average of $2,267 per month in the San Diego apartment market. That performance is down only slightly compared to the end of the first quarter of this year, when rents rose 14.1% on an annualized basis, an all-time high for the region. For context, the long-term market average is 3.3%.

But when adjusting apartment rent growth for inflation, San Diego’s rent growth in real terms sits at 3.5%. That figure is forecast to end 2022 at just shy of 3% when adjusted for inflation.

It may take another few months for rent growth to further moderate as San Diego is amid the traditionally strong spring leasing season, when apartment demand heats up heading into the summer months.

But given that the region’s vacancy rate is trending near an all-time low of 2.6%, demand will likely filter primarily into new inventory where units are more readily available. The vacancy rate for luxury units is 6.2%, while it remains under 2% for both mid-tier and workforce housing.

Rents were up 15.9% year over year in the region’s luxury segment, climbing to an average of $3,160 per month. That’s $800 per month more than in mid-tier housing on average, making many of those high-end units out of reach for the region’s renters-by-necessity.

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