Investing in San Diego

[Brandon B.]

Hey BP community. 

I am a 1031 exchange accommodator in San Diego and get to see quite a few of the transactions in San Diego county and am involved in a fair amount. 

As I give advice to clients, I always want to make sure it is as comprehensive as possible. I am going to list some facts I am seeing currently in the san diego market - and would love feedback from what others are seeing, as well as additional thoughts you may have.

San Diego real estate:

1. Between 2010 and 2017, 160,000 new jobs were added and population grew by ~8%.

2. Currently, an entire third of San Diego’s population consists of millenials, making it the second most millennial-populated city in the country.

3. San Diego has recently been in the top 10% nationally in terms of real estate appreciation. Since the crisis, San Diego real estate has appreciated by 55.37%. This puts the annual home appreciation average at around 4.5%. 

4. Short term vacation rentals have changed the dynamics, and pricing, of properties on or close to the water. From 2016 to 2017 allow, the short term rental market grew by 15.9%, and while I can't find info on 2018 or 19, I don't think it has slowed down

5. Downtown SD is having a tsunami of investment dollars being poured into it. $2 billion+ from Manchester developments, $1 billion+ on seaport village (including a proposed beach downtown), ~$800 million into Horton Plaza, plus a couple of $100 million dollar developments (such as ritz at 7th and market, and 3 similar developments I know of). Total developments in progress is $5-6 Billion.

6. Rent control has passed - but it seems to be a non factor with limiting rent increases to 8.1% this year, which most properties will not come close to.

7. House flipping is getting harder, but still possible in the right areas. Lots of hard money out there.

8. Since 2006, housing permits for new homes has been significantly below population growth - entering 2019 with San Diego having an estimated 59,000 shortage of dwelling units.

9. With 700,000+ square feet of class A office coming to downtown san diego, how difficult will they be to lease up?

I would love others feedback and thoughts!

[Justin R.]

@Brandon B.

10. Anecdotal (and CoStar, to some degree) data indicates downtown - and East Village in particular - is overbuilt on the Class A high end for rental product.  And, there's quite a bit more coming there.

11. The loosening of regulations (most significantly, Transit Priority Area parking) introduce real risk that mid tier urban rental rate growth outside of downtown will finally stagnate (or mildly fall?) as new units are brought to market in 2021 and on.  Projects that were not viable in 2018 are currently in permitting and will break ground in 2020.  Here I'm referring to 12-48 unit buildings.  As an anecdotal example, there is one 2 block stretch in North Park with no development in the last 30 years that I know has at least 120 new units coming in the next 24 months, across 3 projects, only because the TPA now makes it viable (I know because one of them is my project).  I would counsel heightened caution to anyone buying older 8-48 unit apartment buildings in the urban core - make sure you're covered if/when significant shiny new supply shows up on your street.

12. If 1031ing into smaller property, the ADU+JADU changes coming Jan 1 (bills AB68 and AB881) provide real opportunity. Rental rates for studio units are very high (+/- $1200 in working class areas, far higher elsewhere) and the ability to carve out a JADU out of existing square footage is both relatively inexpensive and a potential big boost to income and value.

13. STR regulations-to-come are a wildcard for property values and rental supply. @Dan H. alluded to this above.  That's a whole 'nother topic.  

I should add that I support the changes that should result in increased supply - they are good for our community and necessary for investor's long term success here (though the previous status quo has been a HUGE benefit to investors over the past 7 years).  We can't expect a vibrant and balanced local economy to continue without addressing our housing supply as well.