From Mr. Nevin at MP Advisors:

With the release of our latest audit for San Diego, we get the most up to date look at the apartment rental market in San Diego.  The report reveals a truth that has been true for some time – it is pretty hard to find a better place to own apartments than in San Diego

With over 117,000 units included in the survey, our apartment vacancy rate sits at 4.75%. That would be a desirable rate to have in the best of times, let alone in the face of broad domestic economic adversity. The national vacancy rate is at an all time high of 8%, but that doesn’t even begin to approach the vacancy factors seen in some of the more damaged rental markets.

Our neighbor to the north, the 800 pound gorilla of the apartment world, had vacancy rates nearly a point and a half higher than ours. San Francisco, was over ¾ of a point behind us in vacancy. The only two other major apartment markets in the country competing with us in terms of vacancy are Washington D.C with a 5.9% vacancy rate and New York at 3%. New York will always enjoy the kind of supply / demand ratio to maintain these kind of figures, and the District, of course, operates under virtual economic immunity when a Democratic administration is in office.

During the height of the last decade, many of the Sunbelt markets were seen as darlings for major investment and these markets are in shambles right now. Orlando, Dallas, Las Vegas, Charlotte and Phoenix all have double digit vacancy rates.

The best part of the deal for San Diego apartment owners, is they have been able to keep low vacancy with very little rent concessions. Rents are off 2% from their peak but are 20% higher than they were in March 2005.

Occupancies and rents are only part of the picture though, the other side is the market for buying and selling these projects.  The combination of strong operating metrics for apartments in San Diego, weakened cap rates from 2-3 years ago, severely obtunded credit markets and a media proclaimed impending commercial real estate collapse, have resulted in no one selling who doesn’t have to.  Since rents are relatively unchanged, NOIs are relatively unchanged and even with 75% LTV financing, these properties do not cash flow much differently than they did 2 years ago. That means very little distressed selling. The majority of distressed apartment sales in San Diego are actually failed conversions.

A search of Loopnet for San Diego apartment projects with at least 10 units that have been listed for sale this year turns up 38 listings. Of these 38, 5 or 13% of them are asking prices at lower than 5 ¼ cap rate and thus are really not doing much more than fishing, that leaves 33 projects for sale. Of the 33, nearly all are “C” properties, at best.  Looking for institutional grade apartment projects in San Diego? Better pack a lunch.  Further complicating the issue is the fact that there are hardly any market rate apartment projects under construction.

So for those who were fortunate enough to get in the driver’s seat in the San Diego apartment market, their cup overfloweth… for the rest, remember that patience is a virtue.

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