San Diego’s Extremely Tight Suburban Vacancy Rate Revives Class B/C Investment Activity

Renters flock to lower-cost submarkets. After a historically strong second quarter the metro entered July with its lowest vacancy rate in nearly 20 years, highlighted by the performance of locales outside the city of San Diego. Over the past 12 months ended in June, six submarkets in South County, East County and along the 78 Corridor saw vacancy fall below 2 percent. Each area noted positive absorption in all four quarters, which supported an average annual rent gain of 8 percent. Despite this increase, average monthly rates in these submarkets are $100 to $450 per month below the metro mean. The lower costs of housing will continue to fuel robust demand for available units in these areas, potentially steering renters to more centrally located submarkets where vacancy is higher.

Development unable to keep pace with high-end demand. Surging home prices, limited single-family construction, and higher earning households’ desire for flexibility have heightened luxury apartment demand in the county, placing Class A vacancy below 4 percent for the first time since 2008. This rate is positioned to remain tight in the near term, as most markets outside the city of San Diego, apart from Vista and Chula Vista, lack notable apartment pipelines. In the urban core, Downtown San Diego will add just 450 units in the second half. This lull in supply additions bodes well for the submarket as it was the only locale to record an increase in overall vacancy over the past year.

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