San Diego is expected to see another year of heightened construction, with more than 2,800 new apartments, according to Moody’s.  

“That will pressure near-term apartment market performance, but the challenging homebuying environment should help rebalance the market’s supply and demand,” said Lu Chen, Director and Senior Economist at Moody’s.

Wildfires affect Southern California

January 2025 brought severe wildfires to Southern California. More than 18,000 structures were affected in Los Angeles County. 

“Our thoughts are with everyone who’s been impacted by the devastating wildfires,” Antosh said. “We’re in close communication with clients who have been affected and are working to provide assistance however we can.”

The wildfires in San Diego were smaller. Still, it’s a reminder to prepare for natural disasters by reviewing and testing business resiliency plans.   

High workforce housing demand

San Diego’s overall vacancy rate is low, but vacancies at Class B and C properties are especially low. Though up slightly year over year, vacancies remained at just 2.5% in the fourth quarter of 2024, according to Moody’s. Vacancies at higher-end Class A properties were 6.6%.

“The tight supply at workforce and affordable housing properties shows they tend to see very durable demand from renters,” said Matthew Krasinski, Senior Regional Sales Manager with Chase.

Class B and C properties also recorded year-over-year rent growth of 2.6%, according to Moody’s. 

“As rent continued to climb and pressure overall housing affordability, rent growth for Class B and C properties weakened towards year end,” Chen said. “However, steady demand will keep the more affordable segment of the market competitive and support its longer-term rent growth.”

Interest rate uncertainty

Federal Reserve interest rate cuts once expected in early 2025 are on hold. The Fed is waiting for more progress in bringing inflation to its long-term 2% target. The timeline for any additional rate decreases will also depend on labor market trends and how the new administration’s early actions influence economic trends. 

Cap rates have risen slightly in response to the elevated interest rate environment, but the impact on San Diego multifamily property values has been modest.

“In situations like this, there’s an expectation that there would be significantly discounted deals, but that’s just not happening. Everybody’s holding their chips and looking for opportunities to strategically deploy them,” Krasinski said. 

Investors seeking or apartment loans may want to consider options that would give them more flexibility to refinance if interest rates decline.

Optimizing cash management

With operational costs on the rise, consider creating a liquidity management plan. Even cash reserves required for operations can earn interest. Meanwhile, choosing fast, frictionless payment methods that get revenue to an investor’s account faster, or extending payment terms with vendors, can improve cash positioning. 

“A team that specializes in working with commercial real estate investors can help you review your operations to find efficiencies and use capital effectively,” Krasinski said. 

Already have a liquidity management plan? It’s smart to review your plan as your business and market conditions evolve to make sure it’s still meeting your needs. 

Adding units with ADUs 

Multifamily investors with underutilized space on their properties may be able to generate additional cash flow with an accessory dwelling unit (ADU). 

“That’s particularly true in places like San Diego, where land is scarce and there isn’t a lot of development relative to the size of the market and demand for housing,” Krasinski said. 

An ADU—also known as a granny flat, in-law suite or garage apartments—is typically a new detached unit built on a property or a converted garage. Property owners considering building an ADU will need to navigate regulations, and the upfront investment can be significant. But the potential for additional cash flow has individual investors and large institutional players adding them to properties, Krasinski said.