Apartment Construction Booming in San Diego but . . . Demand Continues to Leave Supply Behind

Despite an explosion in apartment construction, demand is outstripping the supply countywide, driving vacancy rates to historic lows and rent increases to record highs.

“At the rate things are going,” said housing activist Mel Shapiro, “it’s going to get a lot worse.”

A study of 36,492 San Diego apartment units by Park Weaver Realty in January showed the vacancy rate at 2%, with 37% of the buildings reporting no vacancies.

Only four months earlier, the countywide vacancy rate had been 2.5%, according to a San Diego Apartment Owners Assn. survey of its members’ 23,329 units. That represented the lowest rate in 15 years and was far less than the 6.2% vacancy rate found in a similar 1980 survey.

“With the population growth, we need 10,000 (new) units annually just to maintain the status quo,” said George Carlson, an apartment specialist with John Burnham & Co. “But we are three or four years behind already. Even with the record (construction) level last year we don’t see any glut forming.”

“It would be an economic impossibility to overbuild in the short term,” said Ray Huffman, the San Diego developer who has built apartments in San Diego County since 1959. “If we kept building at the 1984 level for the next three to four years the vacancy rate wouldn’t get down to 5%.”

300 Units Under Way

Huffman currently has 300 units in development, with more on the drawing boards.

Historically, nearly half of the county’s residents rent apartments or other housing units, a good sign to area developers because population grew by 55,000, or 2.5%, in 1984. The county’s population likely will increase by a like number this year, according to Max Schetter, research director of the Greater San Diego Chamber of Commerce.

There were 8,414 new apartments built in San Diego last year, nearly double the 4,372 new units built the prior year and 670% higher than the 1,092 apartments constructed in 1981, according to a Burnham company study.

Countywide, new apartment construction is approaching 10,000 units.

Although that number is large, “there is no sign of this market being overbuilt,” according to Kenneth Mulhern, who specializes in apartments for Coldwell Banker Commercial Real Estate Services.

In one recent 17-day period, Mulhern said, one developer rented all 144 units in a new Mira Mesa apartment building. And in Scripps Ranch, 120 apartments of a 160-unit project were rented in about two weeks.

While those cases might be extreme, he said it is common to lease a new project even in those outlying areas in just 90 to 120 days.

And those results aren’t achieved by underpricing the apartments, Mulhern added.

“Every new project has achieved higher-than-anticipated rents,” he said. Rents have increased 10% to 12% in each of the last two years, according to Mulhern, and newer units are renting for 70 cents to 90 cents per square foot, compared with 55 cents to 60 cents on existing units.

Beach Rentals Soar

The Park Weaver Realty survey showed rents have increased an average 11.95% in the last year, with the beach areas climbing the fastest at 15.7% and South Bay the slowest at 10.94%

Huffman said the 2,500 units he controls throughout the county rent for an average 90 cents to $1 per square foot, compared to 80 cents to 85 cents a year ago.

In some markets, such as Pacific Beach, “we haven’t found the level that’s too expensive,” said Huffman. “There is a limit; there must be a limit. But we haven’t been able to find it yet.”

Rent increases are far outpacing inflation and growth in wages and could have some long-term effects on the nature of the housing market here.

The Commerce Department reports that rents in San Diego County have increased from 25% of the average occupant’s income in 1970 to 31% in 1982, the latest survey available.

“Soon, rents will be 50% of income,” said Huffman. “Many people won’t be able to get out of renting.”

Huffman said more of his apartments are being built for white-collar workers, with greater amenities and higher rents.

Many renters are staying in apartments not out of economic necessity but by choice, according to Mulhern.

“Although some of these people probably could afford to buy a home, they may have neither the inclination nor the desire to do so,” he said. “They might prefer to drive a nicer car or take more vacations than put those discretionary dollars into a large down payment.”

But with the escalating rents, high occupancy levels and expected future demand, apartments are attracting a lot of investor attention.

In addition to the booming new construction, existing units are selling at a record pace. Carlson said 25,559 apartment units changed hands last year in 1,533 separate transactions. That compares with 18,052 units in 1,105 transactions the prior year and just 9,958 units in 874 transactions in 1980.

“There’s nothing I can see that will stop it,” Carlson said of the trend to apartment investing. “There’s just not much more buildable land.”