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Apartment Investors Take a Step Back in San Diego

Sales Activity in the California Locale Succumbs to Reality



By Joshua Ohl

CoStar Analytics

January 18, 2024 | 12:42 P.M.


San Diego’s apartment investment market limped into 2024.

The period in 2021 and early 2022, when rent growth peaked above 13% and vacancy fell to a historic trough of 2.6% while investment accelerated, is a distant memory.


Household formation

and renter demand have slowed, rent growth has moderated below the long-term average and economic concerns are top of mind among many renters and investors.


The fourth quarter matched San Diego's lowest quarterly transaction count in the past13 years. Only about 50 deals closed, the same as the fi rst quarter of 2023. Between 2015and 2019, quarterly transactions averaged 141, and, as recently as 2021, quarterly counts averaged 144.


According to local brokers, the deals that did go through took longer to close and more effort to keep under contract. Brokers also lost deals as they fell out of contract, all contributing to a landscape unlike any seen in the region since the Great Recession, according to market participants. Elevated interest rates, moderating rent growth, rising property expenses and vacancy and fewer available properties stood athwart activity. Tenant protective measures pursued by the city of San Diego — which added layers of retape and increased costs, particularly for value-add opportunities — added to investor uncertainty.


An otherwise unremarkable quarter for transaction activity saw the highest quarterly sales volume since the fourth quarter of 2022, after $900 million in properties traded. More than two-thirds of that volume was driven by the sale of four properties, including the $203 million deal for Palisade in the University Town Center neighborhood. Yet those properties were outliers in a market where the average building sold had 24 units.


Last year, capitalization rates, or the expected rate of return, averaged 4.4%, with numerous deals closing above 5%. In 2022, cap rates averaged 3.6% with very few transactions near 5%. During the fourth quarter, suburban investments averaged a 5%cap rate, while urban deals averaged 4.3%. Both were 100 basis points higher than the end of 2022.


The average price paid per unit in the second half of 2023 was about $380,000 compared to about $410,000 at the end of 2021. Many in the market expect that we have still not found the floor on pricing.


This year's figures could mirror those of 2023, according to market participants, as many investors navigate a period of uncertainty. Even if interest rates begin falling by the end of 2024, it will likely take time, stronger rent growth and steadier demand, for confidence to fully return to the San Diego region.



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