Early Signs Indicate San Diego Apartment Investment Sales May Rebound After Off Year in 2018

Early Signs Indicate San Diego Apartment Investment Sales May Rebound After Off Year in 2018

CoStar Market Insights: 2018 Apartment Sales Suffer Setbacks as Proposition 10 Weighed on Investors

BY JOSHUA OHL  (via CoStar Group)

The $141.5 million sale of the Regents La Jolla apartments earlier this month has the San Diego multifamily sales market back on the right track. Photo: CoStar

The $141.5 million sale of the Regents La Jolla apartments earlier this month has the San Diego multifamily sales market back on the right track. Photo: CoStar

The weight of Proposition 10 hung over the multifamily investment sector in San Diego last year like the sword of Damocles.

Initial voter polling suggested the proposition, which called for rescinding California’s law that limits rent control, would likely pass. It wasn’t until late in the year that the tide shifted and public sentiment turned against the proposition, which voters overwhelmingly rejected during the November 2018 ballot.

But by then the damage had been done. The chilling effect of the proposition on potential investors, combined with slowing NOI growth, lower rent gains and fewer value-add opportunities, all led to decreased sales of multifamily properties in San Diego last year.

Total multifamily sales volume barely nudged above $2 billion, the lowest annual total since the $1.6 billion traded in 2014, and a remarkable change from 2017 when sales volume reached a record high of $2.9 billion. In fact, multifamily was the only property sector in San Diego that saw a decline in total sales last year.

San Diego’s multifamily sales also bucked the national trend. Sales of apartment properties picked up year-over-year in the United States, notching $147 billion in sales, up from $133 billion in 2017.

Still, there were some signs that pointed to resiliency in San Diego’s capital markets. Per-unit multifamily pricing increased more than $300,000 per door from $285,000. Market cap rates held steady at 4.9 percent, with only negligible compression of a few basis points in 2018.

CoStar’s repeat-sale price index, indexed to 100 at the end of 2008, continued its upward trajectory, reaching 213 at the end of the year. Among all of San Diego’s real estate sectors, that was easily the largest index increase.

Apartment Sales Appear On the Mend
It’s still too early in 2019 to tell if investors will jump back into the market, but the initial indications are positive. With one month still left in the first quarter, sales volume has already nearly exceeded the total achieved in both the first and the third quarters last year.

One sale in particular has gotten the year off on the right foot — the $141.5 million sale of Regents La Jolla is the first institutional-quality apartment property to change hands in a single-asset sale in University City (UTC) since 2012. Raintree Partners acquired the property from LaSalle Investment Management at a price that works out to $424,925 per door at a 4.6 percent cap rate.

However, CoStar does anticipate multifamily pricing to level out over the next year after several years of steady gains. While the index is expected to tick up modestly in 2019, CoStar’s market pricing trends suggests that pricing should fall back below $300,000 per door in 2020 as NOI growth continues to cool. It’s about that same time that CoStar anticipates cap rates will begin modestly expanding.

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