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Leasing Picture Looks Brighter for Apartment Communities

Developer Wood Partners LLC has a busy summer ahead, as it begins leasing units in its $90 million, 379-unit apartment complex nearing completion in Kearny Mesa’s Spectrum Center community.

It is also looking this summer to open the first phase of a 108-unit gated apartment community in San Marcos, next-door to the Cal State San Marcos campus.

Like several other firms with local projects in the works, the Atlanta-based company is counting on a market with low supply, tight vacancy and rising employment prospects to fill its new apartments in quick order.

“The current conditions are certainly better than when we bought the property and started construction in the summer of 2010,” says Brian Hansen, Wood Partners’ director of development for Southern California, referring to the Kearny Mesa project. He added that the firm expects “a robust lease-up” at the San Diego complex because of its location within a major local jobs hub.

San Diego County recently placed sixth in the nation among U.S. metro markets for apartment property investment, in the 2012 annual ranking by the commercial brokerage firm Marcus & Millichap. The report, designed to guide potential investors, considers economic growth and other factors impacting supply and demand for apartments.

Positive Rental Prospects

Researchers said the San Diego market will enter a stronger rent-growth cycle in 2012, as properties operate near full capacity. The vacancy rate in the Class B and C segment, older units considered more affordable, is projected to remain in the low 2 percent range, as increased tourism in the region supports employment growth.

The overall vacancy rate, with newer Class A properties factored in, is expected to finish 2012 at 3.4 percent, which is 50 basis points below the region’s past 10-year average.

Marcus & Millichap forecasts that apartment projects delivering 1,480 new units to the local market will be completed this year, up from the 450 units delivered in 2011. Asking rents are expected to rise 4.2 percent.

On the investor side, improving operations and access to low-interest-rate loans will maintain strong interest in properties. But with supply remaining constrained, owners needing to sell “will capture strong offers,” the brokerage firm said.

“The Fed has said it won’t be raising interest rates until at least 2014,’’ said Chris Zorbas, a San Diego vice president of investments with Marcus & Millichap. “In a low-interest-rate environment, the apartment investors will be willing to take some risks.”

John Vorsheck, San Diego regional manager for the brokerage firm, said local apartment development activity is likely to continue rising as long as demand increases, especially as first-time homebuyers face difficulties qualifying to make purchases.

Upward Trend for New Apartments

In its own recent report on the local multifamily market, the brokerage firm Jones Lang LaSalle noted that new apartment completions, as a percentage of current inventory, are expected to trend up over the next several years, but remain at or below historical averages.

This is due to lingering challenges in obtaining construction financing, limited land availability and other barriers to entry.

Despite the challenges, several developers have apartment projects under way in San Diego County, including Garden Communities Inc., Archstone, Atlantic and Pacific Cos., and Alliance Residential.

According to Centre City Development Corp., San Diego’s downtown redevelopment agency, Alliance’s 201-unit luxury community under way in Little Italy is among at least 12 proposed downtown apartment projects in various development phases, representing more than 1,700 new apartments in the works.

Figures from the Construction Industry Research Board, a nonprofit industry information bureau, show that builders throughout San Diego County took out permits for multifamily projects valued at more than $368.5 million in 2011, nearly three times the volume of 2010 and representing a total of 2,968 future apartments and condominiums.

The Marcus & Millichap report said housing demand tied to the leisure and hospitality sector is likely to benefit lower-end complexes in Balboa Park and areas near downtown tourist and trade destinations this year.

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