San Diego real estate trends show vacancies rising slightly to a still tight 4.2% by the end of the year, according to Moody’s CRE. That’s below the national average of 5.6%. Asking rents are forecast to rise 3.6% from 2023.

High workforce housing demand

San Diego’s overall vacancy rate is low, but vacancies at Class B and C properties are even lower—just 2.4% in the first quarter of 2024, according to Moody’s CRE. Vacancies at higher-end Class A properties were 6.1%.

Class B and C properties also recorded rent growth of 1.5% between Q4 2023 and Q1 2024, according to Moody’s CRE. 

“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.

The low vacancies across San Diego’s Class B and C properties also mean their rents tend to move with those at Class A properties, said Lu Chen, Director and Senior Economist at Moody’s CRE. “That may continue in the near term, especially as low affordability in the Class A market supports demand for Class B and C properties.”

Interest rate uncertainty

The Federal Reserve has kept interest rates elevated, waiting for more progress in bringing inflation to the long-term 2% target. 

Cap rates have risen slightly in response to higher rates, but the impact on San Diego multifamily property values hasn’t been significant enough to create big opportunities so far, Antosh said. Still, some investors are conserving capital to be ready if those opportunities appear. 

Investors seeking or refinancing apartment loans while waiting for interest rate relief may want to explore strategies that give them options as the rate environment shifts, such as shorter terms or lower prepayment premiums. 

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. 

ADUs—also known as granny flats, in-law suites and garage apartments—often consist of 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 alike adding them to properties, Krasinski said. 

Rising insurance costs 

Property-management expenses have been on the rise. One item that’s seen particularly large increases is insurance. 

Premium increases aren’t entirely avoidable, particularly for properties in areas at increased risk of fires or flooding. Still, staying on top of maintenance and keeping properties in good shape can help as investors seek to manage costs. 

“Insurers will look at how recently you’ve replaced the roof, whether a building has copper or galvanized pipes, or whether the electrical system has been upgraded,” Krasinski said. 

Investing in preventive maintenance can also help control capital expenses by keeping small issues from turning into bigger, more expensive problems.