By PHILLIP MOLNAR

San Diego Union Tribune

August 19th, 2019

A continued rise in San Diego home prices could mean opportunity for apartment owners, said a new report from commercial property firm Marcus & Millichap.

The firm’s third quarter report for San Diego County is bullish on rental profits because it anticipates home ownership will remain out of reach for many residents —even high earners. It foresees that people staying out of the home market will continue to drive demand for luxury, or Class A, apartments and older Class B and Class C units.

Marcus & Millichap’s report is a different perspective than much of the recent industry news. A sharp drop-off in new apartment construction in San Diego County was largely seen as the result of slowing rent gains, and a continued reduction in home sales was pegged largely on San Diegans hitting affordability walls.

However, people still need somewhere to live and the real estate firm said that means opportunity for apartment owners.

“There will be a certain percentage that will have to continue to rent just because they can’t make that jump” to homeownership, said Aaron Bove, a senior vice president at Marcus & Millichap.

It’s not the first time the firm has made a similar forecast. In November 2018, it predicted major rent gains as mortgage interest rates were on the way up. Rents did go up, but mortgage rates have been plummeting. In July, the average mortgage interest rate for a 30-year, fixed-rate loan was 3.77 percent — up from 4.53 percent at the same time last year, said Freddie Mac.

Marcus & Millichap calculates it is substantially cheaper to rent than make the typical mortgage payment, even with a 30-year loan and 20 percent down. It said it is about $1,387 a month cheaper to rent than pay the typical mortgage of a median-priced home.

Bove said rents would likely increase 3 percent to 4 percent in the next year as vacancy continues to be low.

The report said the vacancy rate continues to hover between 3.4 percent and 4 percent, despite 3,770 rentals being added in the last 12 months. Marcus & Millichap says there are more than 8,400 rentals under construction that should be completed by late 2021. One of the biggest complexes will be the 840-unit 500 Hotel Circle North development in Mission Valley, part of an overhaul of the Town and Country Resort.

One thing investors may need to consider this year is growing pressure for rent control in California from many politicians and activists. A bill from Assemblyman David Chiu (D-San Francisco) would cap rent increases at roughly 9 to 10 percent a year. AB 1482 would apply to rentals 10 years or older, but would sunset in three years. It was scheduled to be heard by the state Senate Appropriations Committee on Monday.

“Legislative changes have produced uncertainty in the market and it has given some of our investors pause,” Bove said.

He said while the rent cap is high, which should not worry investors as much, some are concerned there would eventually be a push to extend the legislation past its three years.

Apart from AB 1482, there are other recent instances of government agencies stepping in to try and slow rent hikes. Last week, the City Council of Culver City voted to cap annual rent increases to 3 percent in buildings built on or before February 1995.

No community in San Diego County has ever had a rent cap. A rent control measure in National City was voted down in November 2018 which would have capped annual rent increases at 5 percent. According to the Marcus & Millichap report, National City has had the biggest yearly rent gain, up 6.2 percent in a year to $1,655 a month.

The other communities listed as having large increases were El Cajon-Santee, up 4.7 percent to a monthly average of $1,539; La Jolla-University City, up 3.8 percent to a monthly average of $2,431; and La Mesa-Spring Valley, also up 3.8 percent, to a monthly average of $1,736.