San Diego’s Apartment Investment Market Sees Lackluster Sales
Investors Display Caution Amidst Rising Interest Rates
By Joshua Ohl
CoStar Analytics
August 9, 2023 | 9:13 AM
The relatively sluggish apartment investment market in San Diego weighs heavily on investors who are showing caution following the strong interest rate growth of the last year, which has been reflected in the drop in transactions across the region.
Between 2015 and 2019, San Diego averaged more than 140 quarterly multifamily sales. With fewer than 65 sales closing last quarter, representing a 40% decline compared with the second quarter of last year, there have been less than 120 deals through the first half of 2023. Consequently, the quarterly average during the past year has only been 63 transactions.
The $400 million in investment volume during the second quarter was a 10% increase compared with the first quarter, although it still represented one of the lowest quarterly volumes in the past 10 years and a 60% drop compared with the second quarter of 2022.
In recent years, investment volume peaked during the last two quarters of 2021, when $2.3 billion and $1.9 billion in deals were transacted. Even last year, three of four quarters exceeded $1 billion in sales volume. Sales volume through the first half of this year was down more than 60% compared with the first half of 2022.
The average transactional capitalization rate recorded by CoStar research is similar to the first quarter average of 4.5%, which is a nearly-100 basis-point jump compared with the average transactional cap rate recorded during the first half of 2022.
Properties in suburban locations have seen an average cap rate of 4.7% in 2023 compared with 3.5% in the first half of last year. Urban properties, meanwhile, have traded at an average cap rate of roughly 4.3% in 2023 compared with 3.7% during the first and second quarters of 2022.
Market participants are likely to continue to navigate a period of pricing discovery coupled with property expenses from maintenance to insurance all having increased. Some landlords have seen insurance rates skyrocket by more than 50% per unit in the past 12 months.
Although demand has returned in 2023 and household formation has ticked up, more than one investor in San Diego has noted that they anticipate more of the same through the rest of the year.