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Apartment Rents Continue To Rise as Demand Improves

San Diego Leads California in Rent Growth

By Joshua Ohl

CoStar Analytics

June 6, 2023 | 7:27 AM

Apartment rent growth continued to bounce back in San Diego. During May, apartment rents rose an average of 0.8%, extending a streak to five months of increasing rents after rents declined during the final four months of last year.

Rents are up 3.2% year to date through May. With one month left to go in the second quarter, the rate increase already matches the average first-half rent growth rate between 2015-2019.

That's a welcome reversal for landlords who have seen overall renter demand in San Diego turn negative over the past 12 months. Household formation had slowed due to persistent inflation, rising interest rates and increasing cost-consciousness among renters.

Yet absorption, which measures the change in occupancy over time, may have turned the corner in 2023. Through May, net absorption has already tallied about 900 units. The surfeit of that demand is filling four-and five-star properties, where net absorption has measured roughly 1,000 units in 2023 and 2,500 units in the past year.

And while still underwater from an annual perspective, demand has been positive year to date in three-star properties. One-and two-star buildings have seen demand continue to tumble, with net absorption tallying about -150 units across San Diego in 2023.

Overall, rents are up 3.4% in the past 12 months. That's the strongest rate among all apartment markets in California during the past year, and it's the best performance among major West Coast markets during the stretch.

Average rents in four-and five-star-rated apartment buildings saw rents increase by 1.2% in May, and rents in those properties are 4.1% year-to-date. With demand beginning to return to mid-tier inventory, rents were up 0.5% in May and 3.6% year-to-date. And while rents increased by an average of 0.5% in May for workforce housing, the weight of falling demand has seen rents rise only 1.5% in 2023.

San Diego's La Jolla and the University Town Center neighborhoods saw the strongest rent increases in May, up 2.4%. That was followed by another coastal area just to the north. The North Shore Cities neighborhood saw apartment rents rise by an average of 1.4% in May, and rents have already increased a whopping 4.8% there in 2023. That is the biggest year-to-date increase in San Diego.

But the performance was not evenly distributed among coastal areas. Rents in the Point Loma and Coronado neighborhoods fell 0.2% in May, although they are still up 3.4% in 2023. This is typically the time of the year when new renters flood the beach areas for the summer months before returning home to other states.

In downtown San Diego, where nearly one-third of the region's under-construction pipeline is underway, rents edged up by 0.5% in May and are now up 1.25% in 2023. New supply that's on the way in Little Italy and East Village could curtail rent growth prospects there, however, as competition heats up among new buildings entering their lease-up phase.

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