Builders Focus on Downtown, Mission Valley and Balboa Park
By Joshua Ohl
CoStar Analytics
February 29, 2024 | 7:35 AM
Construction levels in San Diego’s apartment market have remained stable despite rising construction costs, elevated interest rates, sluggish demand and moderating rent growth.
More than 8,400 market-rate apartment units are under construction across the region, almost identical to the quarterly average of units in the pipeline over the past three years.
The heaviest pockets for construction activity in San Diego will sound familiar. Downtown San Diego leads the region with nearly 2,500 units, or 16% of existing inventory, under construction. That’s right in line with the five-year average.
Several projects, including Holland Partner Group’s West project, are scheduled to open this year, which could push vacancy above 10% for the first time since 2020. The 431-unit West property is part of a mixed-use development that includes 290,000 square feet of office space. The price tag has swelled from $400 million to about $470 million due to escalating labor and material costs coupled with higher interest rates, according to the developer.
In Mission Valley, more than 2,000 market-rate units are under construction. That’s 30% more units in the pipeline than the five-year average, representing nearly 8% of inventory. Trammell Crow is building the 531-unit Alexan Camellia on a former Dixieline Lumber site demolished at the end of 2022. It is tentatively scheduled to open at the end of 2024 and represents an increasingly common approach by builders to redevelop vacant retail sites.
Balboa Park has become a focal point for developers over the past several years. More than 900 units are under construction, accounting for 3% of existing inventory, and thousands of parcels in these inner ring neighborhoods have been up-zoned to accommodate more housing. A proposal for Hillcrest, for instance, envisions high-rise towers along several transportation arteries and would more than double density in some locations. Many of these corridors are part of the City of San Diego’s Complete Communities initiative.
Most of the properties that are built here are comprised of studios and one-bedrooms. The average unit built in these neighborhoods since 2020 measures more than 100 square feet smaller than what has been built across the balance of San Diego during that period. Local developers have discussed that they can build smaller units here for under $500,000 per unit. Yet while elevated interest rates have increased the cost to build a unit by about $5,000, rising construction prices can increase the development costs by upwards of $50,000 per unit.
Only about 3,000 market-rate units are scheduled to open in San Diego this year. The past two years saw an average of 4,000 open, and new supply outpaced demand each year. Although supply additions are expected to outpace demand again this year, the delta is expected to be much narrower.