Vacancy Rates Declining : Apartment Seekers Facing Shortage in S.D. County
An apartment shortage is fast approaching as San Diego County’s population growth continues at 3% to 4% annually, the supply of available land dwindles and building permits become harder to obtain, housing experts say.
The vacancy rate at apartment buildings surveyed in fall by the San Diego Apartment Assn. was 5% in the city and 5.4% countywide, contrasted with 8% in the city and 8.9% countywide last spring. Vacancy rates below 5% are considered by many experts to indicate a shortage.
Although this is good news for apartment-building owners, apartment hunters will soon face rent increases, said George Carlson, an apartment-building broker with John Burnham & Co. in San Diego.
‘Push Rents Up’
“Maybe it’s happening now . . . once it gets down about 5%, you’re getting into a situation where the tenants are competing for space and that will push the rents up,” Carlson said.
“Ever since apartment construction peaked in 1985, there has been a steady decline in new projects here,” a slowdown caused mostly by a “combination of overbuilding, tax-law changes, discontinuance of tax-exempt bond financing and lack of affordable land,” Carlson said.
Tax-exempt bond financing was eliminated in 1986 for most types of real estate development, removing low-cost financing for developers and making it more expensive to develop apartment buildings.
Another reason for the impending apartment shortage is that the federal Tax Reform Act of 1986 reduced the attractiveness of apartments as investment tax shelters, said Derek Thomas, director of real estate consulting services for Kenneth Leventhal & Co.
“So the high volume of apartment development that we’d seen in the early ‘80s really came to almost a standstill,” Thomas said.
And, without the tax advantages, added John K. Wingfield, partner in charge of the tax department at Price Waterhouse, “people are less inclined to invest in real estate properties solely for tax purposes. Now they’re looking only at sound, economic real estate deals that will be successful, not withstanding any tax ramifications. Now it’s back to location, location, location.”
The tightening of the apartment market has mostly to do with increased demand and a diminishing supply.
The county’s population grew by 79,200, to 2,327,700 people, last year and the city of San Diego’s population grew by 19,900, to 1,058,700, last year, according to estimates by the city of San Diego’s finance department. Dennis Turner, a senior planner with the Planning Department, said San Diego will surpass Detroit this year as the sixth-largest city in the country.
In addition, many communities have clamped down on housing construction. The San Diego City Council, for example, capped local housing development at 8,000 houses, condominiums and apartment units for the 18-month period beginning Aug. 21, 1987. That’s less than one-third of the total yearly permits issued by the city, on an average, from 1978 to 1987.
Decline in Construction
In reaction to high vacancy rates three to four years ago, apartment construction has been dropping off for three years, Carlson said.
Jack Guttman, president of Guttman Construction, a San Diego development and construction firm, said there has probably been a 65% drop in the number of new apartment permits granted by the city in the last two years.
“The high price of new housing has kept people in apartments. Interest rates are going up. Savings and loans are going to cut back on their residential loans . . . there’s no question there’s a short supply” of apartments, he said.
Guttman said his company is now focusing on building apartment complexes on older, developed parcels. “That’s the only way we’re finding opportunities.”
Rates Cyclical
Historically, apartment vacancy rates have been cyclical, reaching lows of 2.4% in fall, 1984, and rising to 8.9% by spring, 1987, said Alan Ziegaus, a spokesman for the San Diego Apartment Assn. “You can see (an apartment shortage) coming,” Ziegaus said. “It’s gone from the 7% or 8% range down to 5% in a very short period of time.”
Ziegaus predicted the shortage will occur “as quickly as next year” unless there is an increase in apartment construction. Guttman and Ed Aloe, real estate broker with the Rancho Bernardo office of Coldwell Banker, both predicted a shortage will hit this year.
Lack of available land is helping cause the shortage, Ziegaus said, citing the 13,000 acres, between North City West and Rancho Bernardo, that has been set aside as an urban reserve by the city for future development.
“Voters voted in 1985 that they would place (the future urbanization area) off-limits until after 1995, as a land bank for the future of the city,” Ziegaus said. “We would argue that that land is needed now.”
Even though vacancy rates will continue to gradually decline in the county, a few discounts and incentives for renters can still be found in parts of East County and North County, Carlson said.
Aloe says those incentives are slowly disappearing. “Vacancy rates in Escondido were 15% a year and a half ago. Now it’s 6%,” he said. Aloe blamed the shortage on slow-growth policies and lack of land.
Even though vacancies are high in communities such as Vista, where 9% of all apartments surveyed by Coldwell Banker are still vacant, Aloe expects rates for North County in general to drop below 5% before the end of the year.
