Vacancy Falls to 20-Year Low Amid Homeownership Roadblocks and Near-Term Pipeline Moderation

Demand in larger submarkets outpaces sparse deliveries. San Diego apartment fundamentals are among the strongest in the nation. Spanning the past two years ended in March, 7,200 units were delivered, yet vacancy fell 240 basis points, highlighted by Class B and C vacancy rates falling to 1.1 percent and 0.7 percent, respectively. Additionally, availability in all submarkets but Downtown San Diego is below 2 percent and demand for urban rentals is improving, evident by the 520-basis-point compression registered in the CBD over the past 12 months. The lack of completions downtown this year suggests core vacancy may further compress in the near term. Similar to downtown, the Highway 78 Corridor and East County submarkets, which account for 30 percent of the metro’s rental stock, lack supply additions in 2022, preserving robust demand for existing rentals.

Affordability gap steers more households to upper-tier units. Class A vacancy entered this year below 2 percent and is poised to hold below that threshold during 2022. Delivery volume is slated to fall under the prior five-year average, while diverse job creation is expected to support the strongest rate of household formation in the past nine years. For many of these households, purchasing a single-family residence will not be an option, as the metro’s affordability gap — the difference between an average rental rate and a mortgage payment on a median-priced home — is the largest in the past 14 years at $1,800 per month.

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