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Job Growth Helps Effective Rent Growth of 8.0% Fifth Highest in Nation

Contributed by Sophie Zatterstrom Gore, November 19, 2015

The market for San Diego apartments has become one of the hottest stories of late 2015, according to Axiometrics’ apartment data.

The San Diego-Carlsbad Metropolitan Statistical Area (MSA) achieved an annual effective rent growth rate of 8.0% in October, 291 bps above the 5.1% recorded in October 2014, according to Axiometrics apartment market research.

That rate was the fifth highest in the nation among Axiometrics’ Top 50 markets, based on number of units, and well above the national rate of 4.9%.

Rent growth has been on a relatively steady increase since the end of the recession, averaging 6.7% since January 2015 with a peak rate of 8.4% in September. Occupancy was 95.9% in October and has averaged 95.7% since January.

Strong employment growth is fueling the San Diego apartment market: The MSA is expected to add 42,343 jobs this year, a 3.1% job-growth rate, well above the nation’s 2.1% rate. The current strength of San Diego’s employment market becomes apparent when comparing it to its long-term growth rate of 1.6% (2.2% when excluding years of negative employment growth). The unaffordable single-family housing options residents are faced with also work in the apartment market’s favor.

Apartment supply, relative to its long-term average and relative to demand, also contributes to the performance of San Diego apartments. An average of 4,263 units were delivered to the market annually from 1999-2009, when the last recession began. Since then, new supply averaged 2,414 units per year – bottoming out at 928 units delivered in 2011 and surpassing the average in 2014 and 2015. Over the same time, demand has averaged 3,100 units annually, 686 units over the supply average. Excess demand enables higher rents and occupancy rates.

San Diego apartments are being well absorbed, with 18 units absorbed per property per month (on a trailing 12-month basis) as of Nov. 9. Axiometrics has identified a total of 3,774 units for delivery in San Diego in 2015, the bulk of them in the second half of the year.

The strength of the metro’s apartment market is also apparent when looking at asset class performance. Most new apartment deliveries are Class A properties, and as new supply comes to market, the increased competition normally causes Class A rent growth to slow. But not in San Diego.

Annual effective rent growth among San Diego Class A apartments reached 9.3% in October. Classes B and C followed with rates of 7.6% and 6.7% respectively. Nationally, large amounts of new supply is among the reasons that Class A has lagged behind the other asset classes (4.6%, compared to Class B’s 5.5% and Class C’s 5.1%), but it appears that demand for new apartments is still strong in San Diego.

The metro is expected to record an average annual effective rent growth rate of 6.7% in 2015, well above the 1997-2014 average of 3.5%. Occupancy also is expected to outperform its long-term performance this year, averaging 95.3% compared to 94.5%. Rent growth is expected to moderate somewhat in the next two years, as job growth slows, averaging 3.9%. Occupancy rates are expected to average 95.3% over the same period.

The report was posted on AXIO Metrics Inc. and can be found HERE.