The earlier blog mentioned the basic advantages that are common to all income properties: leverage, inflation protection, equity build up, cash flow, tax shelter, etc.
These words focus on two laws which are immensely beneficial to owners of San Diego apartments: supply and demand. The short version is that there are more people who want to rent in our county than who are able to rent here. That has been true for 50 years and is likely to continue for a while longer.
When demand exceeds supply, prices climb.
Even more important, there are more investors who want to buy San Diego apartments than owners who want to sell.
First, consider demand for apartments for rent. More than 10% of the families in LA and Orange County have told pollsters that they would prefer to live in San Diego. A million tourists visit us annually. Many would like to live here. Even though Great Recession has slowed the flow, there are still more than 100,000 in Baja who would rather be on this side of the border.
Next, think about the demand for apartments from investors. San Diego has lower vacancy rates and steadier appreciation than most other major US cities. Interest rates are at the lowest rate in our lives. Stock dividends do not offset inflation. Apartment investment is the “tallest midget in the circus.”
On the flip side, what about supply? For 27 of the last 30 years San Diego has not built as many apartments as were needed. Cities have down zoned apartment land and increased development and construction fees. It can cost $50k for water, sewer, school fees and other permits, before any land, labor, or construction material. New apartments usually cost more than $200k. Perhaps only 10% of our renters can afford $2500 a month rent. In other words building new apartments is not cost effective. Offices have a much bigger risk and higher vacancy because of overbuilding.
So the laws of supply and demand limit investment risk. Thousands of people want to rent or own rentals. For 50+ years zoning codes and development fees have restricted new construction. Rents often climb more than 30% a decade, surprisingly close to the inflation rate.
Thus supply and demand are the second to seven major reason why San Diego apartments excel. Next we’ll consider why San Diego’s economy is safer than many other major metropolitan cities.