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Tuesday, Jul 23, 2024
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Luxury Apartment Construction Hits Temporary Slowdown

REAL ESTATE: ‘Robust Times’ Expected After Interest Rates Decline

SAN DIEGO – Several new luxury apartment projects have either recently opened in San Diego or are opening soon in the tail end of a construction boom that is ending as high interest rates and a rising cost of materials have put a damper on new construction.

Zach Hammond
General Manager, San Diego
Suffolk Construction

“There’s still a lot going up because the tricky thing with high rises is, it takes a whole lot of time to build them,” said Jason Kimmel, senior director of Cushman & Wakefield brokerage.

“We’re just in a waiting period. I don’t think there’s going to be a lot of private development starts, probably for the next 12 months,” said Zach Hammond, general manager of Suffolk Construction in San Diego.

Jason Kimmel
Senior Director
Cushman & Wakefield

“One of the things that is really going to trigger all of this, that we’ve all been waiting for very patiently, is for inflation to lessen so that the Fed will lower rates,” Hammond said.

“The timeline for when rates are going to start to be lowered and the pace at which they’ll be lowered thereafter, I think is still under discussion.”

Despite the slowdown in new construction, experts said that San Diego is a highly desirable market with construction of high-end apartments expected to return to normal levels within the next two years.

Community plan changes and zoning changes that allow for denser development in some areas of the city are also likely to spur new apartment construction once interest rates come down.

“We will be in for some really robust times, particularly in San Diego,” Hammond said.
Suffolk’s ongoing projects include Park Summit, a 22-story apartment town being built in Bankers Hill by Floit Properties.

Hammond said that historically, the Gaslamp Quarter, Little Italy and UTC have been the neighborhoods that have been most associated with construction of high-end apartment towers.

Bankers Hill has long been known as one of the pricier markets for high-end apartments, but Hammond said that it is “an emerging neighborhood” for the development of tall towers, like those in Little Italy and UTC.

“There’s a big wave of work that is currently active and underway in Little Italy,” Hammond said, adding that national developers have also been eyeing UTC.

Better Market Coming

“San Diego is still a place where developers want to be,” said Kimmel of Cushman & Wakefield.

“We’re probably getting as many calls as ever from developers around the country who want to be in San Diego,” Kimmel said.

Like Hammond, Kimmel said that it will be a year or so before development takes off again, although he said it won’t be as dramatic as it was immediately following the COVID 19 pandemic.

“It won’t be the same volume as 2020,” Kimmel said. “It’s just not on the same trajectory.”

Kimmel said that for now, investors are hesitant to commit to building new luxury towers partly because high construction costs have made it less expensive to buy existing buildings than to build new ones.

“One of the biggest problems with (building) multifamily, especially downtown, is you can buy existing assets below replacement costs,” Kimmel said.

Kip Malo
Managing Director
JLL

Kip Malo, a managing director with JLL brokerage, said that the market for buying and selling apartment buildings is slow but starting to improve.

“Last year was particularly slow,” Malo said. “If you have the right product and the right location, it’s still trading.”

Peter Jones, project director of Project Management Advisors, said that with many new projects finishing, “It seems to me that there might be a slight oversupply in the area, but I think the demand is still there, especially in places like Little Italy.”

Jones said that UTC is also likely to see more luxury apartment development when interest rates drop and the community plan for the area is updated to allow denser development.

Peter Jones
Project Director
Project Management Advisors

“Once that happens, you’ll see an increase in residential development,” Jones said.

Similarly, Jones predicted that Hillcrest, Bankers Hill and North Park will have increased activity.

“In general, anywhere you have these real walkable areas with amenities such as Balboa Park and their restaurants, that luxury demand is going to be there,” Jones said.

Apartments in The Lindley, a 37-story building at the edge of Little Italy, will be available for leasing later this summer. Rendering courtesy of Toll Brothers Apartment Living

Competitive Rental Market

Among the luxury apartment buildings soon to open is The Lindley, a 37-story apartment building at the edge of Little Italy with 363 apartments being built by Toll Brothers Apartment Living, the company’s first project in San Diego.

Toll Brothers expects to begin leasing at The Lindley later this summer, said Michael McCann, Managing Director of Toll Brothers Apartment Living in the West Region.

Michael McCann
Managing Director
Toll Brothers Apartment Living

“The luxury apartment market in downtown San Diego and the Little Italy area has remained strong over the past year and is expected to continue to be strong over the next few years,” McCann said. “We look forward to welcoming a wide range of residents who are looking for a sophisticated, urban lifestyle.”

Adam Covington, senior development director of Greystar, said the that the company’s $100.2 million apartment tower, 525 Olive in Bankers Hill, is fully leased and “very popular.”

Covington said that buying a home or condominium has become so expensive and so few are up for sale that, “renting a luxury apartment is still super attractive.”

Adam Covington
Senior Development Director
Greystar

“San Diego has had the fastest rising home prices in the U.S. for six months, up 10% a year,” Covington said.

High mortgage rates and homeowner association fees also take some of the luster away from buying.

“Luxury communities are able to capture the necessary amount of renters from the demand pool,” Covington said, adding that, “San Diego has remained one of the most competitive rental markets in the United States.”

Covington said that 95% of the apartments in San Diego were rented in the first six months of 2024, “which leaves 10 prospective renters to compete for the same unit.”

Monthly apartment rental rates, which had been soaring in the years immediately following the pandemic, have plateaued or even dropped slightly.

“You’re going to see (rent) growth this year, but it’s not going to be like we’ve seen in the last few years,” Kimmel said.

Crystal Chen
Associate Director
Zumper

Zumper, a national apartment listing service, reported that San Diego rents are down, although the company did not break out rents for luxury apartments.

“San Diego saw both one- and two-bedroom rents decrease 1% annually in May and rents have only continued to decline in June,” said Crystal Chen, an associate director of Zumper.

After peaking in April 2022, “The San Diego rental market has cooled considerably this year,” Chen said. “San Diego also has new supply becoming available as the overall demand is lessening, so that also puts downward pressure on prices.”

Rudy Medina
Founding Partner
Next Space Development

Yet Rudy Medina, founding partner of Next Space Development, said that he’s getting “extraordinary rents’ with strong demand for high-end apartments in a Bankers Hill apartment building that he’s finishing and just started leasing.

Medina said that he’s getting monthly rents as high as $6,999 for a 1,000-square-foot, two-bedroom apartment.

“You’ve heard it a million times. It’s location, location, location,” Medina said. “That’s a special site because you’re across the street, literally, from Balboa Park.”

While his project lacks some of the amenities of competing projects, “The community amenities are really what we’re selling,” Medina said. “We’re selling the walkability score, which is basically 10 in that area.”

Gary London
Senior Principal
London Moder Advisors

Real estate economist Gary London, senior principal of London Moder Advisors, said that the market for high-end apartments is “kind of stagnant” in part because rents have gotten so high, even with the recent downturn in rental rates that Zumper reported.

“The affordability crisis in San Diego has definitely bled into the higher end,” London said. “There’s only so much that people can afford, even at the high-end levels.”

Alan Nevin, director of economic research at Gafcon, said that he, too, has seen a softening of demand for luxury apartments.

Alan Nevin
Director of Economic Research
Gafcon

“To the extent that we’re not having a large number of people moving here, as we once did, the luxury apartments, particularly downtown, are having a tough time staying full and they’re having to give concessions, sometimes one or two months of free rent,” Nevin said.

“We’re not getting enough jobs that pay a sufficient amount for folks to afford these luxury apartments.”

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