San Diego Leads California in Rent Growth
This year has started off on a brighter note for apartment landlords in San Diego. The
four-month decline in rents across the region at the end of 2022, which saw rents fall by 2.4%, came to a halt after rents grew for the first time here since August.
That brought average market-rate asking rents in the San Diego apartment market to about $2,340 per month, which represented 5.1% growth over the past year. That was the best performance in California among metropolitan areas with more than 10,000 market-rate apartment units.
In San Diego, rents rose 0.5% in January. That was the strongest monthly rent growth since last July when rents grew at a similar rate. Both luxury and mid-tier properties saw a 0.7% increase in asking rents in January, while workforce housing saw a marginal adjustment of 0.01%.
On an annualized basis, rents in four- and five-star properties have risen by 4.1%, while
three-star properties climbed 6.1%, and one- and two-star properties recorded year over-year rent growth of 4.8%.
That unorthodox performance was antithetical to demand. Over the past 12 months, net absorption, which measures the change in occupancy over time, tumbled by roughly 1,400 units in workforce housing and about 800 units in three-star buildings.
Conversely, luxury properties single-handedly have kept net absorption marginally positive in the past 12 months, after nearly 2,300 units were absorbed during that period. Average market rents in those properties are now above $3,200 per month.
Due to rising unaffordability driven in-part by high housing costs, persistent inflation and rising interest rates, household formation has largely come to a screeching halt across San Diego. Many renters are reluctant to move as they face concerns about finding a new apartment that is cheaper than their current one.
Landlords are also working through eviction proceedings that had largely been placed on hold since the start of the pandemic. That could loosen vacancy even further in pockets of the region. As it currently stands, the vacancy rate has risen to 4%, a 150 basis point jump in the past 12 months. That's the highest apartment vacancy rate seen in San Diego since the end of 2020.
San Diego is certainly in the midst of a correction after the turbo-charged environment in 2021 that saw demand reach an all-time high, and rent growth reached a similar peak of 14%. But the correction is more of a normalization of the region. Nominal rents are still growing above the long-term average of 3.5%, and the rate is expected to settle near that historical average by the end of this year.