Underwriting Changes on Multifamily Properties - San Diego

[Daniel Frye]

Hello all,

I am underwriting an acquisition of an apartment portfolio in San Diego. It is a unique opportunity to purchase from a distressed seller with almost all units completely renovated. In a normal world, this would make all the sense in the world even with flat rents for a period of a few years!

But now, I am unsure how rents will respond year over year. That is my main concern. I believe rents will grow over the course of a 10 year+ holding period due to our normal supply/demand issues here, typical inflation, as well as (my perspective) further inflation due to increased money supply eventually working its way into the real economy.

In talks with a couple property managers, they think there is a possibility of rents dropping 3-10% year over year from 2020-2021. What do you all think? And what other underwriting assumptions are you rethinking when looking at multifamily acquisitions in the current market?

[Dan H.]

In San Diego, I expect re prices to fall 5% to 20% but I expect rents to rise.  Here is some of my rationale:

• There is still a housing crisis.   Vacancy areas are very low.  New housing stock is expensive.  The ADUs are one of the more expensive new development options so they will not drive rents downwards.  There is no more desirable land to build (you could go East but it fairly quickly gets to be not very livable).  
  
  There is a new identified risk.  Basically that the government can remove the owner’s ability to evict non paying tenants in times of crisis.  This new risk has to be built into the rent rates.  
• 
  All the printed money has a good chance to create some inflation pressures.  
  
  The Great Recession did not result in local rent decrease.  

I am expecting average rent in San Diego to increase the local inflation rate plus 5% (I.e. max legal older multiplex increase amount).

Good luck