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Multifamily Market Likely to Continue Its Momentum in 2012

Rising demand from renters kept San Diego County apartments full in 2011, while scarce new construction and historically low financing rates kept them popular among investors, and experts say both trends will be in full force during 2012 and beyond. “Money has been coming off the sidelines, and investor demand has been increasing,” said Chris Zorbas, a vice president of investments in the San Diego office of brokerage firm Marcus & Millichap. With an election year under way, he said U.S. fiscal policy leaders are unlikely to take action that would raise interest rates, likely meaning a continued favorable financing climate for well-capitalized buyers. Observers say that several of the region’s largest property deals of 2011 involved apartment buildings, and many were off-market transactions — the properties had not been formally placed on the market by their owners but still attracted buyers. The Big DealsAccording to CoStar Group, big acquisitions included Virginia-based AvalonBay Communities Inc.’s purchase of the 676-unit Highlands at Rancho San Diego apartment complex in El Cajon for $124 million in October; AvalonBay’s acquisition of the 450-unit Waterstone Carlsbad complex for $78.1 million in January; and San Diego-based R&V Management Corp.’s October purchase of the 240-unit Woodbend Shadowridge complex in Vista for $44.3 million. “AvalonBay has been very active in this market,” said Darcy Miramontes, an executive vice president in the San Diego office of brokerage firm Jones Lang LaSalle. Citing data from Pierce-Eislen Inc., JLL reported that while the total value of large local multifamily transactions fell from $546.9 million in 2010 to $415.2 million in 2011, the total number of deals rose, from 12 to 21. Miramontes noted that while more capital became available for apartment deals in 2011, lenders generally remain cautious, and the investment community will be watching to see, for instance, whether the volatile debt situations of European countries have an impact on U.S. finance rates and capital availability in 2012. In the meantime, local apartment construction lags rising demand among renters, created in part by the improving jobs picture, the preference of young professionals for high-density urban settings, and potential buyers’ continued challenges in breaking into the single-family housing market because of stringent lending practices. In the near term, Miramontes said, apartment investors anticipate 3 percent to 6 percent annual rent growth in the local market. The latest data from Marcus & Millichap indicates that the region’s apartment vacancy rate was expected to end 2011 at 3.2 percent, among the lowest in the nation for major metro areas. Meanwhile, only 460 new units had come online as the year drew to a close, more than 60 percent below the average of the past five years. The supply is expected to increase starting in 2012, thanks to a sharp rise in apartment construction permits pulled during the past year, but asking rents will likely keep rising — after increasing 1 percent in 2010 and 2 percent in 2011 — as move-in concessions fall by the wayside. San Diego-based Wermers Cos., which develops and builds apartment complexes throughout California, has been busy in the past year and expects the same in 2012. Setting the FoundationCEO Tom Wermers said that starting in late 2010, through the first half of 2011, investor equity began going after property for apartment development. Many of the land parcels purchased in that period will see projects breaking ground in 2012. “It was a situation where the developers were teed up to build, and all they needed was their financing,” Wermers said. Wermers said his company was involved in 10 to 12 multifamily projects around the state in 2011, many in infill locations and master-planned developments. Some of Wermers’ past and future projects involve older buildings in the process of being replaced. About a third to half of the company’s overall work volume is in San Diego County, with the rest spread throughout the state.

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