CoStar Predicts: Industrial Will Best Apartments To Lead Major Property Types in Rent Growth

CoStar Predicts: Industrial Will Best Apartments To Lead Major Property Types in Rent Growth

E-Commerce Growth Expected To Keep Driving Demand for US Warehouses

By Adrian Ponsen
CoStar Analytics

January 13, 2023 | 9:06 AM

The U.S. industrial real estate market won’t be immune to economic headwinds in 2023, but the sector enters the year with the lowest vacancy rate and strongest absorption level of the major commercial property types.

The industrial property sector also has the potential to keep leading all property types in rent growth. This comes in part because the apartment sector, typically a close competitor in terms of its ability to generate out-sized rent gains, has shown clear signs of weakening demand.

Apartments may trail industrial in performance because elevated mortgage rates, inflation, and worries over a potential recession drove a slowdown in U.S. household formation during the second half of 2022, with third-quarter apartment absorption at less than half of typical seasonal levels recorded during the three years before the pandemic. This, combined with apartment development at a multi-decade high, has resulted in the U.S. apartment vacancy rate rising by a full percentage point since late 2021.

In contrast, the U.S. industrial vacancy rate has held within 20 basis points of all-time lows in the face of record new completions.

Heading into 2023, U.S. industrial absorption is still running more than 25% above typical pre-pandemic levels. That comes as e-commerce retailer Amazon has resumed signing large leases, making major commitments for new space in the Bronx, Pennsylvania’s I-81 Corridor and the San Francisco Bay Area for space needed for delivering goods ordered online to doorsteps.

Apartment Complex Trades in High-Demand Area of Suburban San Diego

Apartment Complex Trades in High-Demand Area of Suburban San Diego

Deal Topping $72 Million Among Largest of Year in North County Region

Rockwood Capital acquired the 126-unit multifamily property known as The Rylan in Vista, California, north of San Diego. (Walker & Dunlop)

By Lou Hirsh
CoStar News

December 21, 2022 | 2:58 P.M.

An apartment sale topping $72 million in Vista, California, is among the largest of the past year in San Diego's North County region, underscoring strong suburban demand among investors and renters.

Rockwood Capital, a San Francisco-based investment firm, purchased the 126-unit property known as The Rylan from developer Streetlights Residential of Dallas for approximately $72.5 million or $575,000 per unit, according to public data and brokerage firm Walker & Dunlop, which represented the buyer and seller. Built in 2020, the complex is located at 100 Main St.

The deal ranks, based on total price, as the fifth largest of the year in the North County area and the 18th largest in the San Diego region, according to CoStar data. The per-unit price was well above the average $453,000 paid in North County and $448,000 paid in the San Diego region.

Walker & Dunlop managing director Hunter Combs said in a statement that the sale of The Rylan presented prospective buyers with the opportunity to buy a relatively new property in the heart of downtown Vista, where apartment construction traditionally has been infrequent. Also, the property is near regional freeways including state Route 78 and interstates 5 and 15, about 40 miles north of downtown San Diego.

The North County area has among the San Diego region’s lowest apartment vacancy rates, trending toward an all-time low at 2.6%, according to a CoStar Market Analytics report. The rate currently is below the overall regional rate of 3.5%. North County’s rent growth during the past year was 5.6%, topping the regional rate of 5.2%.

“This area remains among the most active submarkets for investors, especially among value-add buyers,” Joshua Ohl, director of CoStar Market Analytics in San Diego, said in a report on North County apartments. “With high interest among both institutional and local parties, sales volume is typically among the highest in the metro.”

North County apartment sales totaled $508 million during the past 12 months, down 1.8% from the prior year. The pace of sales was better than that of the overall San Diego region, which posted $4.4 billion in sales for a 24.6% decline.

Ohl noted North County’s apartment demand is bolstered by a growing cluster of technology companies along Route 78, the presence of Marine Corps Base Camp Pendleton near Oceanside and other employers based in Carlsbad, which is adjacent to Vista.

Prices Are Surging for Land, the Foundation for All Property Sectors

Prices Increase 12.6% Over Past 12 Months Driven by Demand for Apartments and Warehouses

By Mark Heschmeyer and Nicole Shih
CoStar News

August 9, 2022 | 12:09 P.M.

Land has been one of the strongest-performing commercial real estate sectors in the past year and a half as investors have flocked to the physical foundation for all real estate development.

CoStar Group’s U.S. Land Index, a tool used to track the property type, increased 12.6% in the 12-month period that ended in June and is now 33.9% higher than its February 2020 pre-pandemic level.

The price increases have been driven by a surge in volume. Land sales approached $100 billion in 2021, up from less than $60 billion in 2020 and $70 billion in 2019, according to CoStar data. Volume in the first half of this year is on pace to surpass $100 billion.

The index is currently 70% higher than its peak between 2006 and 2011, a period that includes the Great Recession. It’s 200% higher than its lowest point during that time.

Last year’s results were the best in nearly a decade, according to the 2021 "Land Market Report" from the Realtors Land Institute and the National Association of Realtors.

The high demand for land last year was driven by a number of factors, according to the report, including historically low mortgage rates, more move-ins than move-outs at multifamily and industrial properties, and the resiliency of the retail market.

Next year is expected to remain just as good for land investment, according to Lawrence Yun, the National Association of Realtors’ chief economist.

“Even with rising interest rates, I expect sustained growth in land sales and prices this year, driven particularly by the demand for multifamily and single-family housing needs,” Yun said in the report. “The shift from just-in-time to just-in-case inventory management amid supply chain issues will continue to drive the demand for land for new warehouses. Moreover, agricultural grain prices will remain elevated due to the war in Ukraine and thereby boost demand for farmland.”

Apartment Rents in San Diego Rising at a Historic Rate

Apartment Rents in San Diego Rising at a Historic Rate

Fourth Quarter Saw a Seven-Year High for Rent Growth

By Joshua Ohl
CoStar Analytics

January 21, 2022 | 1:57 P.M.

San Diego’s apartment market saw record demand during 2021, when annual net absorption, which measures the change in occupancy over time, eclipsed 10,000 units, more than doubling the five-year average for the market.

Given that the occupancy rate has settled near 98%, net absorption in the San Diego apartment market is expected to moderate this year. But moderation does not portend that demand is cooling off, but rather there just are not enough available units to continue trending at that level.

On the back of that demand, annual rent growth reached an all-time high at the end of 2021, with asking market rents in San Diego growing 13.5% on a year-over-year basis. That was three times higher than the market's five-year average.

It appeared that rents had begun flattening out at the end of 2021 as often happens due to seasonality, October was the first month since April 2020 that rents fell, but that turned out not to be the case.

Fourth quarter rent growth in San Diego averaged less than 0.2% each year between 2015 to 2020. However, the fourth quarter of 2021 posted 0.8% rent growth, the strongest showing during that quarter in seven years. The end of 2014 was the last time rent growth was stronger, when it grew by 1%.

That was in large part driven by the short-term recovery in November and December, when rents grew 1.3%.

Although demand is moderating, rents are still projected to continue rising above the rate of inflation through 2022, particularly with little supply-side pressure this year. Fewer than 3,500 market-rate apartment units are scheduled to deliver this year, and only about 7,500 units are in the pipeline.

San Diego Apartment Investment Roars Back to Life

San Diego Apartment Investment Roars Back to Life

Transaction Volume Soared Past $5 Billion for the First Time in More Than 20 Years

By Joshua Ohl
CoStar Analytics

January 6, 2022 | 2:04 P.M.

As was the case in the San Diego industrial capital markets, multifamily investment volume soared to an all-time high in San Diego last year, with almost twice as much transaction volume recorded as the next highest year, with nearly $5.5 billion in deals, topping all of San Diego’s property sectors in 2021.

The final two quarters of 2021 each exceeded $1.6 billion in transactions, with the third quarter topping $2.3 billion. No other single quarter in the San Diego multifamily market over the past 20 years reached $1.5 billion in volume. That comes after local brokers have noted that there are more investors chasing apartment properties than are offered for sale.

The market sale price, which is based on the estimated price movement of every property in the market, rose more than 13% in 2021 to $400,000 per unit, while the market capitalization rate fell almost 10 basis points to 4%, which is one of the lowest rates in the United States.

Buyers received an average discount of roughly 2% off of asking prices last year.

Mission Valley and East San Diego both topped $1 billion in trades last year. National investors are attracted to Mission Valley’s merchant builds and institutional properties, highlighted by the deal for the 2021-vintage Gravity, which sold to RedHill Realty Investors during the fourth quarter for $177.5 million.

Investment volume in east San Diego was driven by the sale of the Prebys portfolio in the third quarter that sold for nearly $1.5 billion. Several buildings in the portfolio were located in eastern San Diego. It has also been one of the primary targets by investors over the past several years who are interested in value-add plays. That was the case when the Parkway Club in El Cajon sold for $87 million in the fourth quarter to Utah-based equity fund Bridge Investment Group.

The neighborhoods along the north Interstate 15 corridor could have also topped that level. Three properties traded in Escondido at over $400 million during the fourth quarter. However, two of them were purchased by partnerships involving the California Municipal Finance Authority, while the third involved a Lyon Living portfolio that sold to a partnership involving the California Statewide Community Development Authority. Those buildings will be converted to middle-income affordable housing, removing them from the market-rate data set.

And much like 2020 ended with one of the largest foreign investment plays in the region in years, when Canada-based Brookfield Asset Management purchased Vantage Pointe in downtown San Diego for more than $300 million, 2021 ended with Brookfield purchasing the Merian for $240 million.

Senate Bill 9 Would Allow Duplexes on Detached Home Lots To Address State’s Housing Crisis

California Assembly Advances Bill To Eliminate Single-Family Zoning

Senate Bill 9 Would Allow Duplexes on Detached Home Lots To Address State’s Housing Crisis

The California Assembly passed Senate Bill 9, which would allow duplexes on single-family lots. (Getty Images)

By Randyl Drummer
CoStar News

August 26, 2021 | 3:06 P.M.

The California Assembly advanced a measure aimed at chipping away at the state’s worsening housing shortage by banning single-family zoning that critics say has contributed to steep increases in housing costs.

Senate Bill 9 would allow property owners to subdivide up to four units or duplexes on a single-family lot without requiring hearings or approvals from cities.

The bill authored by Senate President Pro Tempore Toni Atkins, a San Diego Democrat, passed the Assembly by a 44-19 vote on Thursday.

Senate Bill 9 and a related measure passed by the Assembly this week aiming to cut red tape and allow cities to open new areas to medium-density housing are expected to return to the state Senate next week for a concurrence vote before heading to Gov. Gavin Newsom’s desk.

The Democratic governor, who faces a Sept. 14 recall election, has not indicated publicly whether he intends to sign the bills, and his office did not respond to requests for comment. Newsom campaigned for office three years ago seeking to add 3.5 million housing units by 2025.

Local government officials, community activists and progressive groups called on Newsom to oppose the bills. They said the zoning changes would undermine local control over their housing, worsen traffic and parking woes and allow developers to build more expensive rentals when California needs more affordable housing.

"In 20 years when we haven’t dealt with the consequences of bills like this on transportation, utilities and parking, we’re going to be devastating these communities," Adrin Nazarian, an Assembly member from the suburban Sherman Oaks neighborhood of L.A.'s San Fernando Valley, said on the Assembly floor on Thursday. "My community will go downhill."

Wendy Carrillo, a Democrat from East Los Angeles, described the bill as a modest solution in response to "Not In My Backyard," or NIMBY, the popular characterization of anti-development positions.

"We're seeing the lies about this bill on social media," Carrillo said. "The people say 'yes, we want to build, just don’t build here, go build over there.' Enough."

California YIMBY, a nonprofit group working to end the state's housing shortage that sponsors the two bills, said Senate Bill 9 will significantly increase the most populous state's affordable housing supply.

“By making it legal to build duplexes and allow the division of single-family properties into two properties, many more middle-class Californians will be able to afford to buy their first home," California YIMBY CEO Brian Hanlon said in a statement.

The Legislature, where Democrats hold majorities in both houses, has advanced several bills that are aimed at cutting regulations and costs to developers and increasing density.

California needs to build an estimated 1.8 million to 2.5 million new homes just to keep up with population growth by 2025, according to a study three years ago by the Terner Center for Housing Innovation at University of California, Berkeley.