San Diego, Ca
San Diego Real Estate Investing Market Summary
San Diego Real Estate Investment
Located in Southern California, San Diego is the second largest California city. The multifamily real estate investing scene is summarized by expensive rents, low vacancy, and strong rent growth. While average rents are much higher than the national average, a costly housing market and little permitting to build more single-family homes create a massive barrier to entry for homeownership, leading to increased rental demand.
Contents
San Diego Real Estate Market Labor Statistics
Population
Population growth is the lifeline for all walks of property investors. Population growth is paramount to a healthy rental market.
Per census.gov, as of July 1st, 2022, the city of San Diego’s population was 1,381,611.
There is other deep demographic data on the linked page and information about the San Diego housing market, healthcare, and education. Ideally, you’d see a growing percentage of residents moving into the city
To find this data, the Census organizes population data by decades. There are two pages we need to review:
Its good to look at population growth for one year, three years, five years, and seven years. You can take the population today as the base and use the reports above to compare it to past years.
One year could be an anomaly, while a zoomed-out view could be much more insightful:
San Diego 1-Year Population Growth: -0.27%
San Diego 3-Year Population Growth: -2.83%
San Diego 5-Year Population Growth: -1.46%
San Diego 7-Year Population Growth: +0.42%
Finally, the last metric we like to look at is the age cohort of the population in San Diego County. Ideally, you’d see a large cohort of the population aged 25 - 34 (Millennials) and robust growth coming from these folks.
This “Young Adult” or “YA” age group has arguably the most potential in the workforce and is coming into its prime. More young, professionally aged workers coming into the county are bullish for future employment fundamentals.
This Census.gov data set is as recent as July of 2020.
It’s a little more involved, and a pivot table is needed.
YA as % of Total County Population: 16.42%
YA 1-Year Growth: -0.27%
YA 3-Year Growth: -0.33%
YA 5-Year Growth: +2.05%
YA 7-Year Growth: +6.90%
And finally, I want to take a look at net domestic migration. This report was last updated in 2021.
State-to-State Migration Rank = 48th
State-to-State Increase (as % of Population) = -0.94%
We use the Bureau of Labor Statistics data for unemployment, labor force, and job information.
Data Current Through: 05/2022
Unemployment Rate
Unemployment 1-Year Average: 4.58%
Unemployment 3-Year Average: 6.21%
Unemployment 5-Year Average: 5.08%
Labor Force
Labor Force 1-Year Growth: +3.38%
Labor Force 3-Year Growth: +0.46%
Labor Force 5-Year Growth: +1.32%
Job Growth
Job 1-Year Growth: +7.64%
Job 3-Year Growth: +0.65%
Job 5-Year Growth: +2.47%
Major Employers
The concentration of too many employees working at one company is risky. If something happens to a significant employer and jobs are lost, many renters could leave the market searching for other employment opportunities.
Normally, I’ll do some Google searching to see if I can find if any employer accounts for more than 5% of the workforce. The U.S. Navy and the University of California, San Diego, are the two largest employers in the region but aren’t employing anywhere close to 5% of the total workforce. Private companies including Apple, Qualcomm, Realty Income, and Sharp Healthcare also play a prominent role.
Employers > 5% of the workforce: 0
Household Wages
Resident incomes are essential. More education will correlate with more income and less poverty. The last three labor statistics we look at come from census.gov quick facts and involve median income, poverty, and education.
5-Year Median Wage: $83,454
% of Poverty: 11.80%
% of the Population with a Bachelor’s Degree (25+): 46.70%
San Diego Rental Property Fundamentals
Rental Stats & Vacancy
Higher future rents in a submarket make development projects more enticing and value-add more lucrative. Looking at the current rents of a submarket and how they’ve trended over there years is an essential step. Preferably, historical rental data shows good growth over the past few years and overall rent levels that are still “reasonable” and affordable for a large swath of renters.
I use Apartment List for rental data as they publish monthly reports on rental and vacancy trends.
You can also read about Apartment List’s calculation methodology here. A local “boots on the ground” commercial real estate brokerage team, realtor, or other real estate service providers may also help provide you with rental statistics in a city or neighborhood.
Rental Stats
Average Rental Rate: $2,387
Rent Growth 1-Year: +19.35%
Rent Growth 3-Year: +27.58%
Rent Growth 5-Year: +34.40%
Vacancy Stats
Current Vacancy: 3.86%
Vacancy 3-Year Average: 4.58%
Vacancy 5-Year Average 4.83%
Reasonable rents, explosive rent growth, and low vacancy is the most desirable combination for future rental income growth.
Affordability
Solid rent growth trends are moot if the tenants struggle to pay their monthly obligation. I like to compare the average rental rate with the 5-year median wage (from earlier).
$83,454 / ($2,387 x 12) = 2.91
Many property managers will require rents to prove a 3x gross income/rent ratio. Anything above 3.00 is generally considered healthy and affordable.
Another significant component of rental affordability is the local homeownership stats. If San Diego homes are cheaper than apartments, it may sway “would-be” renters into home buyers.
To get home value intel, I use Zillow’s research center. You’ll need to specify which kind of housing you want to be included. I include all single-family homes, townhouses, condos, and co-ops.
San Diego Median Home Value: $1,005,359
Note: You could also check with local real estate agents who likely have access to the multiple listing services (MLS) data of recent list prices, price cuts, and other valuation data.
Higher median home prices create a higher barrier to entry to homeownership, especially for first-time homebuyers. I estimate the monthly mortgage obligation as:
I assume a 5% down payment for principal interest, the current market interest rates on debt, and a 30-year amortization.
For the “other costs” like insurance and property taxes, I lean on the Census.gov quick facts for “housing costs without a mortgage” and tack them onto the principal and interest payment.
In San Diego:
Principal & Interest = $5,574
Other Costs = $630
Total Estimated Mortgage = $6,204
Note: It may also be wise to account for a mortgage insurance premium (MIP) on top of insurance and property taxes.
I then like to compare this amount to the submarket rent. The greater the cost of homeownership, the more sensible renting is.
Total Estimated Mortgage = $6,204
Average Submarket Rent = $2,387
$6,204 / $2,387 - 1 = 159.89%
Owning a home is over 2.5x more expensive than renting in San Diego (although you must remember that renting a newer unit in the best San Diego neighborhoods (such as La Jolla, Pacific Beach, or Point Loma) will likely be more costly than the “average” and vice-versa.
Homeownership
It’s essential to dig deeper and understand the local housing landscape.
You can get the homeownership rate from the Census.gov quick facts.
Homeownership Rate = 47.50%
The higher the rate, the more risk of eventually losing apartment residents that convert to homeowners.
I also like to know the total housing stock (rental, SFH, condos, etc.). The Census website provides housing stock data broken down by county. I added all the housing stock for the following counties:
Total Housing Stock = 1,237,638
I also want to know how many single-family homes are planned. Too much new housing supply could be troubling for apartment rentals. The Census provided MSA-specific permit information on single-family home permits (updated each May for the last year for the San Diego metropolitan area).
2021 SFH Permits: 3,227 units
And finally, I want to divide the SFH permits by the total housing stock. This intel will help compare to other cities to gauge the supply.
SFH Permits / Total Housing Stock = 0.26%
A high percentage may foreshadow a future housing supply glut that adversely affects rental metrics.
Multifamily Development
If you’re a developer, you’d be wise to run the same calculation as we did for SFHs, but for apartment units (or the number of permits for structures with 5+ units).
2021 5+ Unit Permits: 6,399 units
And then divide by the total housing stock.
5+ Unit Permits / Total Housing Stock = 0.52%
The lower, the better if you are a multifamily developer. The higher this ratio, the more competition you’ll be against when leasing the units.
Multifamily Supply
Supply metrics are essential if you’re looking to enter a new market. Oversupply of apartments can lead to high vacancy and dismal rental trends, thus making it hard to maximize cash flow. I like to look at total rental units in the MSA.
That number alone doesn’t tell us much. When you divide it by the population and total housing stock, it gives you valuable insight into the population compared to other markets around the country.
Total Apartment Units: 308,973
Apartment Units / Population: 9.26%
Apartment Units / Total Housing: 24.96%
High ratios don’t bode well for investors entering or actively participating in the market with large investment portfolios.
Summarizing the San Diego Real Estate Market
San Diego real estate investing has seen strong rent growth, low vacancy, and a likely solid return on investment. Rent levels are higher than in most major metros, and affordability is getting pressed even with robust local incomes. Purchasing a home in San Diego is challenging for many, with median prices eclipsing $1 million and very few single-family homes in the construction pipeline.
Today’s analysis will give you a high-level assessment of the San Diego submarket. I believe that if the fundamentals aren’t good in a particular city, it will be tough to have sustained success at the project level for real estate investment opportunities.