Are We Being Dramatic? San Diego Multifamily Market

Why 2026 May Be the Year to Reposition, Trade Up, and Future-Proof Your Portfolio

As 2025 draws to a close, the narrative around San Diego multifamily has been loud:
Vacancy is at a decade high.
Rent growth is negative.
Concessions are back — and sticking around.
Sales volume feels slower.

But is the market as dramatic as the headlines make it seem? Or is this actually a rare setup for investors to reposition for 2026–2027 gains?

Using CoStar’s latest Q4 data (including rent trends, vacancy, absorption, construction, and capital flows) plus year-over-year countywide metrics from December 2024 to now a more nuanced story emerges

Yes, the market is soft and it’s recalibrating.
Investors who understand how to interpret this moment will be positioned to capture opportunities very few owners recognize yet.

1. The Vacancy Story: High, But Misunderstood

San Diego’s vacancy rate has climbed to its highest level in over 10 years, finishing the year at 5.79%, up from 5.20% a year ago.

CoStar notes that annual absorption is 20% above long-term averages, meaning demand exists, it’s simply not keeping up with the historic volume of deliveries.

The key drivers:

• A surge of luxury (4 & 5 Star) supply pushing that class’s vacancy to 10.7%

• Nearly 6,000 market-rate units delivered last year, the most in 20 years

• Another 5,900 units arriving this year, again near record highs

This isn’t market weakness. It’s new supply distortion, which disproportionately affects newer institutional assets, not the bread-and-butter investor stock.

For smaller 2–4 and 5–20 unit properties, vacancy movement is significantly less volatile, but pricing is being affected by the big-building narrative.

2. Rent Growth: Negative, But Context Matters

Countywide effective rents dipped minimally, –0.30% year-over-year, while asking rents fell just $7, from to $2,521 from $2,528.

CoStar highlights something crucial:

Operators are “buying occupancy.”

Many landlords are prioritizing stability over rent increases. Concessions are commonplace. Lease trade-outs are lower because tenants are re-signing with incentives.

This is not a “rent recession”,  it’s a temporary pressure from luxury supply and affordability fatigue.

Historically, San Diego averages 3.1% rent growth annually. CoStar forecasts we won’t return to trend until after 2026, meaning investors have a two-year window where pricing expectations are more negotiable.

3. Construction & Supply Pressure: A Short-Term Problem

Under-construction units fell 22% year over year (to 8,962) as developers throttled back after the 2024-2025 pipeline surge.

This means:

After 2026, supply pressure relieves dramatically.

Vacancy will normalize.

Rent growth should rebound.

Capital begins competing for fewer assets.

This creates a highly strategic window for 2025–2026 moves.

4. Sales Market: Softening, Not Stalling

Despite what the market “feels like,” the data shows:

• $2.6B in sales over the past 12 months

• Sales volume is down just 19%, but transactions are up 32% (More people are buying, but they’re buying cheaper or smaller assets.)

• Market cap rates held stable, rising slightly from 4.70% to 4.71% 

• Institutional buyers increased their activity from 15% to 33% of all buy-side volume

This means:

Smart money is quietly buying San Diego again.

Many of the largest recent transactions were here — Park 12, Preserve at Melrose, Teresina, Windsor PQ and they were purchased with intentional long-term conviction.

Price per unit has softened in key submarkets, especially in coastal and high-cost neighborhoods where rent declines were most pronounced (North Shore Cities, UTC, Downtown, I-15 Corridor).

5. What This Means for 2–4 Unit Owners in 2026

This is one of the best environments we’ve seen in years for smaller owners to trade up into 5+ multifamily.

Here’s why:

• Price per unit in institutional assets has softened

• Cap rates are higher than 2021–2022, creating better yield potential

• New luxury supply is dragging down comps, temporarily lowering entry points

• By 2027, these discounts evaporate as supply eases

• The 1031 window is ripe for repositioning into stronger long-term assets

For many 2–4 owners, especially those who’ve owned since 2008–2016, your equity position may be more valuable now than in future years where growth normalizes but competition increases.

6. What This Means for 5+ Unit Owners in 2026

Owners in this tier should be looking at:

Portfolio consolidation

Trade older assets with deferred maintenance or regulatory friction for more cash-flow-efficient, newer properties.

Geographic optimization

Some submarkets (like urban core areas) are temporarily undervalued relative to historical norms.

Long-term tax strategy

Owners approaching retirement or considering estate planning can reposition into assets that:

• are easier to pass to heirs

• have stronger cash flow

• require less capital expenditure

• avoid leaving heirs with a fragmented or distressed asset mix

ACI sees many portfolios fall apart during generational transfers. 2026 is a prime year to pre-emptively fix structural weaknesses.

7. The Inheritance Reality: Most Portfolios Aren’t Structured to Survive Transition

This is a theme we’ve personally observed:

Most heirs are not equipped to manage multifamily portfolios, especially those with deferred maintenance.

Properties become mismanaged, liquidated under pressure, or sold at the wrong time due to lack of planning. This soft market gives long-time owners the chance to:

• Simplify their holdings

• Increase cash flow

• Reduce management friction

• Consolidate into one or two higher-performing assets

• Create a clean, easy-to-administer inheritance

Smart repositioning in 2026 prevents families from losing generational wealth in 2035–2040 transitions.

8. So… Are We Being Dramatic About the Market?

Honestly? Yes — a little.

San Diego is not in decline.

We are in a reset, not a retreat.
A recalibration period before the next long-term growth cycle.

The fundamentals remain unmatched:

• Persistent housing shortage

• High-income job drivers (life science, defense, tech)

• Geographic constraints limiting long-term supply

• Institutional capital returning aggressively

This is not a downturn.
This is an opportunistic restructuring phase and those who act during restructuring win disproportionately in the next boom.

9. Why Investors Should Seek Portfolio Guidance Now

In moments like this, the worst position is inaction.

Portfolio strategy in 2026 should focus on:

• Capturing softer pricing

• Using 1031 exchanges to trade up

• Leveraging concessions and vacancy news as negotiation tools

• Strengthening cash-flow structures

• Preparing inheritance-ready asset planning

This is where a dedicated multifamily consultant like ACI Apartments becomes invaluable.

10. Why ACI Apartments Is Positioned to Guide 2026 Investors

ACI isn’t just another brokerage — it’s San Diego’s longest-standing multifamily advisory firm (1982) with a deep bench and continuity in leadership.

The ACI Apartments Team is:

• Actively analyzing every major submarket

• Advising owners on 2–4 unit → 5+ transitions

• Working directly with institutional partners, trustees, and long-time landlords

• Backed by the mentorship and strategic guidance of over 100 years experience from ACI’s legacy counsel.

• Providing valuation tools that go far beyond comps: debt ratios, rent projections, buyer psychology, unit mix positioning, and long-term portfolio mapping

When the market is emotional, investors need clarity.
When headlines are loud, investors need strategy.
When opportunities are temporary, investors need timing.

2026 isn’t a year to wait. It’s a year to shift. And ACI is the team to help you calculate that shift. How much is your property worth?