By Joshua Ohl
CoStar Analytics
August 19, 2024
Property Sales Remain Underwhelming
The impact of elevated interest rates, coupled with moderating rent growth and demand, continues to disrupt San Diego, California's apartment market. Deal flow has been reminiscent of the Great Recession and recovery. During that period, San Diego only saw an average of around 52 quarterly market-rate transactions, compared with an average of 140 between 2015 and 2019.
The past four quarters averaged under 60 quarterly transactions, and only about 110 during the first half of 2024. Although the number edged higher during the second quarter, it still fell far short of what was typical last cycle.
Market participants say deals have taken longer to close and more effort to keep under contract, and rising property expenses have only made closing deals more challenging.
And that was before Proposition 33 made it on the November ballot. The proposition, dubbed Justice for Renters Act, would allow jurisdictions to pursue rent control without limitation to vintage or vacancy if it’s approved by voters. Layered together with tenant protective measures and other policy goals announced by San Diego’s City Council, more than one local investor has mentioned that they are navigating through a period of great uncertainty.
Institutional capital sources accounted for 5% of buyer activity in the first half of 2024 and over 20% on the seller’s side. Fund-level equity and REIT sources played little role during the first half of the year. Those same capital sources accounted for 25% of buyer activity in the first half of 2023.
The average property size to have sold in the past two quarters was about 15 units, which is the strike zone of private investors. Buyers received a roughly 10% discount, on average, off the asking price.
Capitalization rates have ticked up to an average of 4.5, with properties often selling in a band between 4% and 5.5%. Rates have been higher at stabilized properties with market-level rents and among properties in more affordable neighborhoods in North, South and East Counties.
Uncertainty has been a common thread among investors in the current investment environment. With moderating rent growth, tenant protective measures, and elevated interest rates, most local investors expect the landscape to remain largely status quo in the coming months.
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