New apartment construction in San Diego will largely move into neighborhoods in 2020
There might be fewer construction cranes downtown, but that doesn’t mean the region’s apartment frenzy has halted.
Much of 2020’s apartment construction will be in neighborhoods outside of downtown San Diego, which has made up the lion’s share of new rentals the past few years. More building is now occurring in North Park, Hillcrest, Pacific Beach and throughout the county.
There are around 3,500 new apartments planned to open in 2020. That’s down from 4,500 expected at the start of last year, but early numbers show that total was likely not reached. Predicting how many apartments will open at the start of the year can be tricky because delays are frequent and one large project being postponed a few months can skew a yearly total.
Regardless, it appears the San Diego County apartment market is showing little signs of slowing as developers continue to benefit from ever-growing rent. That’s despite concerns over statewide rent control, changes for how developers submit projects downtown and fears of a slowing economy.
The difference this year is a lack of large-scale downtown developments, particularly the massive complexes in East Village and Little Italy that made the last few years seem like downtown was a giant construction site.
One of the downtown’s biggest developers, Nat Bosa of Bosa Development, said there isn’t a whole lot to read into a slowdown. Bosa’s Broadway Block apartment complex, with 620 apartments downtown, is set to open in 2021.
“A little bit of slowing down in the apartment sector is not all bad,” he said, “because there has been a hell of a lot that came on scene. So, we need to absorb all that inventory.”
The movement of many smaller apartment projects into San Diego’s neighborhoods means higher density where single-family homes have dominated for a half-century.
One of those projects is Kansas Modern, a 24-unit complex in the heart of North Park that takes the place of three older single-family homes. Developer and architect Beri Varol said he is bullish on the apartment market in San Diego, especially in North Park where a lot of young professionals want to live.
Varol’s plan is to start rent at $2,100 a month for a one-bedroom and up to $3,400 for a two-bedroom. He said he has seen apartments going for the same rate, which he feels are lower quality, in the area.
“I don’t think we’ll have a problem, honestly,” he said of rental rates.
Varol’s company, BV Architecture + Development, is a boutique developer with smaller-scale projects — similar to many of the developers dominating recent apartment construction with 20 to 50-unit apartment projects throughout the county.
As the name would suggest, the apartment is contemporary and likely to appeal to a millennial renter. It will hold a lot more on the site than the three houses that once sat there, including a new Moe’s Coffee on the ground floor, 17 parking spaces (it is still being decided how spots will be allocated), storage units for all apartments, an outdoor gathering area with a barbecue pit, large balconies for all apartments, and communal bikes (first come, first served ).
Kansas Modern, at 4195 Kansas St., will be a short walk to 30th Street near the Vons grocery store. From there, it is quick access on foot to North Park’s bars, restaurants and shops. Varol said that is one of the main selling points of the project.
“You are in the epicenter of everything that is exciting about North Park,” he said.
Varol said he left out certain amenities that he felt weren’t crucial and, ultimately, meant the costs would not be passed on to renters. There is no elevator in the three-story building and no gym, considering how many there are in the area. The complex includes three rent-restricted apartments for low-income renters.
He said it cost $1.6 million to acquire the land for Kansas Modern, with a total development cost of $9.5 million. It is anticipated to open in early April 2020.
It would hard to find a better location for an apartment than The Collins, a luxury complex in La Jolla that is a short walk from the popular Windansea Beach.
The 15-unit apartment complex from the San Diego-based Murfey Co. is an example of repurposing a building to meet housing demand, albeit on a small scale. The Collins used to be the Nautilus Professional Building, built in 1964, which was mostly used for dental and medical offices.
It took about a year to convert the building, which Murfey Co. calls a “sophisticated callback,” sort of a contemporary style with retro leanings. The company bought the site, along with an adjacent building, for $9.15 million in June 2018. It declined to say the overall development cost for The Collins, which was designed by San Diego-based H2 Architects.
Russ Murfey, co-owner of Murfey Co., said he must have driven past the site with his brother Scott Murfey (also a co-owner) thousands of times and dreamed about what was possible. He said the building had been an eyesore for 20 years and wasn’t serving the community.
“It was really run down and needed a turnaround,” he said. “We saw the opportunity to give it a breath of fresh air.”
The Collins only recently opened and was entirely pre-leased before doors opened. Rents started at $1,995 for a one-bedroom unit (average 650 square feet) and $2,595 for a two-bedroom apartment (average 1,000 square feet). There is one subsidized unit in the building for a renter earning under 50 percent of the area median income. About half the units have ocean views and the main amenity is its proximity to the beach. Russ Murfey said renters are a mix of young professionals and empty-nesters, and most are from the general area.
The four-story building is mixed-use with the Miller & Calhoon law office on the fourth floor and the Valley Farm Market grocery store on the first floor. It is the second location of the market, which has been in Spring Valley since 1956. The 5,000-square-foot grocery store seems to fit in with the La Jolla crowd, featuring organic produce, fresh seafood and meat without added hormones that is range fed.
The market is run by Derek Marso, grandson to the founders of the East County market, who said he’s received hundreds of offers to open a new grocery store somewhere but this is the first time he found a good fit. Valley Farm Market opened in late November, but will likely host its official grand opening in a few weeks.
State of the Market
Rent profits aren’t what they used to be a few years ago, but it doesn’t seem to be stopping developers.
As of the fourth quarter last year, rent was an average $1,850 a month, said real estate tracker CoStar. That was an increase of 3.2 percent in a year, which was down from the past few years when rent was increasing 5 to 7 percent annually.
The rent growth in San Diego County mirrors the economy coming out of the Great Recession. In the fourth quarter of 2010, rent was an average $1,341, and has been going up ever since — rising 38 percent as of the end of 2019. CoStar forecasts rent will continue to increase through at least the fourth quarter of 2024.
In its latest multifamily market overview, real estate firm JLL wrote that demand for apartments would remain strong in San Diego County because of job growth and low unemployment. Other factors it noted were a diverse mix of industries, growing population and a substantial millennial population, 27 percent, the third-highest in the nation behind Austin and San Francisco.
Adding to the renter pool is a highly educated population. JLL said 24 percent of residents over 25 years old have a bachelor’s degree, above the 20 percent national average.
Another potential advantage for apartment developers, JLL noted, was the dropping homeownership rate in the county. Nearly half of the region, 49 percent, are renters. Rapidly increasing home prices, already out of reach for most of the population, are expected to continue this trend.
Large real estate corporations might have reason to seek out the San Diego metro area as opposed to some other markets. San Diego had the ninth-highest rent of the 100 largest metro areas in December, Zumper said, with $1,780 a month for a one-bedroom.
That was more than Miami ($1,710 a month), Denver ($1,520), Chicago ($1,440) and Portland ($1,430).
There are a few things that could disrupt the market as the industry waits to see how everything is going to play out. First, the downtown planning agency Civic San Diego — credited by JLL for quickly approving projects — has been stripped of power and now it will be the responsibility of the city to handle downtown development. The city is still establishing a downtown staff, which may slow approvals for some time.
Second, there is rent control in San Diego County for the first time as of January. However, the new rent cap law only applies to older buildings (projects more than 15 years old) and increases will be capped at 7.2 percent. Rent never increased that much in a year in San Diego County going back to 2001, according to CoStar data.