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4Q’18 San DiegoMulti-Family Market Report

OverviewSan Diego Multi-Family

12 Mo. Delivered Units

3,86312 Mo. Absorption Units

3,370Vacancy Rate

4.5%12 Mo. Asking Rent Growth

3.5%As San Diego's housing shortage shows no signs ofmitigating, San Diego's residents will continue to bear thebrunt of housing price and rental increases. Thesubmarkets where renters-by-necessity have moved toescape the escalating rent levels along the coast and inemployment nodes have only increased that burden.Annual growth is typically strongest in these areas in thenorthern, southern and eastern parts of the county.Annual rent growth picked up notably along the coastalsubmarkets this past summer, too, although those areastend to slow more toward the end of the year.

Builders have spread out across the metro, althoughDowntown will likely remain their focus. Even then,adding enough inventory to accommodate San Diego'sgrowth remains an uphill battle. Developers have largely

focused their attention on luxury units—at the expense ofmid-tier product—primarily because of the high costsassociated with construction and parking, the cost ofwhich continues to escalate. With San Diego's economydiversified among innovation fields, tourism, trade, andthe military, the metro's apartment fundamentals are onfirm footing, and demand remains largely inelastic. Butthat does not mean that some submarkets won't havetrouble absorbing new supply, especially with the waveDowntown.

Investors have taken notice, and they continue to look atSan Diego. However, the level of investment slowed in2018. Tightening lender requirements, slowing rentgrowth and the possible repeal of Costa Hawkins, whichultimately came up short, likely all played a role.

KEY INDICATORS

Asking RentVacancy RateUnitsCurrent Quarter Effective RentAbsorption

UnitsDelivered Units

Under ConstrUnits

$2,4158.6%49,0874 & 5 Star $2,378 665 840 7,723

$1,7834.1%76,9723 Star $1,765 (65) 0 652

$1,3843.1%130,4191 & 2 Star $1,377 (81) 0 0

$1,7804.5%256,478Market $1,762 519 840 8,375

ForecastAverage

HistoricalAverage

12 MonthAnnual Trends Peak When Trough When

5.3%4.3%0.1%Vacancy Change (YOY) 5.4% 2009 Q4 2.3% 2000 Q2

1,7951,7813,370Absorption Units 5,049 2016 Q1 (1,629) 2009 Q1

2,5752,2233,863Delivered Units 6,037 2001 Q2 237 2011 Q2

1201200Demolished Units 604 2010 Q4 0 2018 Q3

1.5%3.0%3.5%Asking Rent Growth (YOY) 7.6% 2015 Q3 -2.5% 2009 Q4

1.5%3.0%3.7%Effective Rent Growth (YOY) 7.3% 2015 Q3 -2.7% 2009 Q4

N/A$1.5B$1.8 BSales Volume $2.9B 2018 Q1 $503.0M 2009 Q4

12/31/2018Copyrighted report licensed to NAI San Diego - 848763.

VacancySan Diego Multi-Family

Several variables suggest continued promisingfundamentals for the metro. San Diego is firmlycemented as a bastion of high tech and life scienceresearch and maintains one of the strongest tech officemarkets in the country. Firms from Amazon to WalmartLabs are expanding here within the next year and willadd hundreds of new tech positions. The metro alsoincludes one of the heaviest concentrations of millennialsin the country accounting for nearly 25% of thepopulation.

Even with the steady stream of new supply rolling intothe metro, San Diego is under-supplied, with bothsingle-family and multifamily housing growth lagging farbehind the pace of household formation. The San DiegoHousing Commission estimates that, based onpopulation growth over the past decade and futureprojections, San Diego will need an injection of 175,000more housing units by 2030. The San Diego RegionalChamber of Commerce released a study suggesting thatlocal municipalities are only approving about half thehomes, apartments and single-family residences,needed to keep up with population growth. Adding tothese supply concerns was the announcement that, by2025, the U.S. Navy will add 20 warships and 15,000sailors—and their families—to the San Diego region. TheCity Council is trying to do its part to address the lack ofaffordable supply. It approved legislation in April 2018that would lower the fees associated with building grannyflats by up to 50%—fees that often stretched above$50,000. The city estimated that upwards of 6,000granny flats could be built within the next decade as aresult.

Taken as a whole, though, demand should still be steadyfor existing and future product, especially with homeprices continuing to price out would-be buyers. In fact,the average absorption velocity in properties delivered in2017 across the metro is about five units more per monththan in either 2015 or 2016 deliveries. That trend held

firm with 2018's deliveries, too.

But Downtown's pipeline is likely to cause a rise invacancies that's expected to last for several years,though, and landlords commonly offer six to eight weeksof free rent to attract renters. Among Downtownneighborhoods, absorption is strongest in the EastVillage, where properties in lease up average almost 30units per month, including Park 12 and Shift. In LittleItaly, where new projects are smaller, monthly absorptionduring lease up is fewer than 15 units per month.Manchester Pacific Gateway, the $1.5 billion commercialproject, should bring some much-needed office inventoryto the Downtown Submarket, propping up demand forthe new apartments being built. The redevelopment ofHorton Plaza into a tech hub and other renovations inthe pipeline should do the same.

San Diego’s supply constraints offer few choices forrenters. Median home prices sit above $600,000, andresidents who can’t afford a down payment havenowhere else to turn. Government studies show thatnearly 70% of San Diego residents would be unable toafford the median home price. With a median householdincome near $75,000, affording a mortgage with taxesand insurance would consume almost 70% of thatincome. The Case-Shiller Home Price Index increased35% in the past five years alone, and 30-year fixedmortgage interest rates are up near 5% compared to lessthan 4% a year ago. And renters interested in movinginto homeownership must deal with the added burden oftoo little for-sale inventory. The city estimates that for-sale stock is about half of what is traditionally needed tokeep up with demand, about three month's worth, whichfurther reinforces apartment demand. However, migratorytrends suggest that residents have felt the pinch of highhousing costs. Inland Empire, Texas, and Phoenix havereceived among the largest volumes of San Diegotransplants dating back to 2012, according to the U.S.Census Bureau.



ABSORPTION, NET DELIVERIES & VACANCY

VACANCY RATE



VACANCY BY BEDROOM


RentSan Diego Multi-Family

San Diego's high rents could be constrained by the largepercentage of renters-by-necessity located mostly in thesubmarkets south and east of Downtown and toward thenorth. The metro’s high cost of living pushes this groupinto rental product, but because these tenants are pricesensitive, their landlords might not be able toaggressively raise rents without driving them out. Rentgrowth is already moderating and is anticipated to slowsubstantially beneath the long-term average by 2020.

Unlike other metros that might have neighboring marketsoffering affordable living alternatives, very few optionsexist for San Diegans to flee to from the high rents here,though perhaps Temecula is an alternative, as averagerents there fall a few hundred dollars below San Diegoand as homes cost a few hundred thousand dollars less.Concessions are offered primarily in new deliveries anddo not generally provide an outlet for savings in lower-tiered and older communities. Concessions are heaviest

in the Downtown Submarket, where some apartmentsoffer up to eight weeks free and no parking fees.

Much like in Orange County, rents here have beenexpanding more quickly than income. As they now stand,average rents in San Diego account for almost 45% ofrenter median household income. Landlords have showna willingness to permit residents to lease a unit whentheir income-to-rent ratio is approaching 50%, a rarity inthe past. Additionally, while vacancies are tight andturnover is often low, landlords note their propensity toraise rents upwards of 20% when a unit does turn over.That's especially true for new investors, who often mustraise rents to pay for the high property taxes.

Neither the National City effort to enact rent control northe statewide effort to repeal Costa Hawkins passed onthe November 2018 ballot.

DAILY ASKING RENT PER SF



MARKET RENT PER UNIT & RENT GROWTH

MARKET RENT PER UNIT BY BEDROOM



4 & 5 STAR EXPENSES PER SF (ANNUAL)

UtilitiesMgmt. InsuranceMarket / Cluster Taxes Other Total

Operating Expenses Capital Expenditures

Admin. Payroll Water Maint. Appliance Structural

San Diego $0.70 $9.33$0.16$0.12$1.60$0.37$1.75$1.28$0.84$0.86$0.86 $0.79

Balboa Park $0.57 $9.03$0.13$0.11$1.64$0.35$1.72$1.30$0.90$0.80$0.81 $0.70

Chula Vista/Imperial… $0.57 $9.20$0.13$0.15$1.64$0.35$1.72$1.30$0.90$0.80$0.81 $0.83

Coronado/Point Loma $0.35 $8.82$0.09$0.13$1.43$0.46$2.50$1.14$0.65$0.69$0.85 $0.53

Downtown San Diego $0.57 $9.03$0.13$0.11$1.64$0.35$1.72$1.30$0.90$0.80$0.81 $0.70

East San Diego/El… $1.73 $11.10$0.28$0.11$1.64$0.35$1.72$1.46$0.99$0.80$0.81 $1.21

La Jolla/UTC $0.35 $9.01$0.09$0.12$1.60$0.50$2.37$1.15$0.66$0.69$0.85 $0.63

Mission Valley/Nort… $0.50 $8.95$0.12$0.13$1.25$0.47$2.58$1.18$0.68$0.70$0.84 $0.50

National City/South… $0.57 $9.09$0.13$0.14$1.64$0.35$1.72$1.30$0.90$0.80$0.81 $0.73

North County $0.57 $7.88$0.13$0.14$1.66$0.31$1.27$1.10$0.74$0.64$0.77 $0.55

North I-15 Corridor $1.16 $11.23$0.27$0.08$1.77$0.29$1.05$1.50$1.11$1.52$1.19 $1.29

North Shore Cities $0.57 $7.82$0.13$0.14$1.65$0.31$1.31$1.10$0.73$0.58$0.75 $0.55

South I-15 Corridor $0.89 $10.02$0.26$0.08$1.89$0.34$1.24$1.37$0.82$1.11$0.86 $1.16

Expenses are estimated using NCREIF, IREM, and CoStar data using the narrowest possible geographical definition from Zip Code to region.

3 STAR EXPENSES PER SF (ANNUAL)




San Diego $0.77 $8.04$0.17$0.12$1.38$0.23$1.20$1.22$0.82$0.76$0.72 $0.65

Balboa Park $0.58 $7.99$0.13$0.11$1.38$0.26$1.30$1.24$0.85$0.75$0.75 $0.64




East San Diego/El… $1.52 $9.32$0.30$0.10$1.38$0.12$1.03$1.39$0.98$0.76$0.73 $1.01

La Jolla/UTC $0.33 $7.13$0.09$0.11$1.29$0.48$1.39$1.10$0.60$0.65$0.61 $0.48



North County $0.54 $7.24$0.12$0.13$1.55$0.15$1.17$1.04$0.70$0.61$0.71 $0.52

North I-15 Corridor $1.11 $8.39$0.25$0.08$1.41$0.19$0.89$1.19$0.83$1.42$0.63 $0.39


Outlying San Diego… $1.61 $9.41$0.34$0.10$1.35$0.13$0.97$1.41$1.00$0.76$0.74 $1.00

Poway/Santee/Ram… $1.65 $9.70$0.37$0.10$1.39$0.15$1.00$1.45$1.05$0.76$0.77 $1.01

South I-15 Corridor $0.83 $7.87$0.24$0.08$1.41$0.19$1.01$1.28$0.71$1.03$0.66 $0.43




1 & 2 STAR EXPENSES PER SF (ANNUAL)




San Diego $0.62 $6.59$0.13$0.10$0.99$0.20$0.99$1.07$0.65$0.72$0.65 $0.47

Balboa Park $0.51 $6.87$0.11$0.10$1.15$0.24$1.11$1.20$0.56$0.71$0.70 $0.48




East San Diego/El… $0.92 $6.33$0.14$0.09$0.78$0.11$0.83$1.00$0.62$0.72$0.69 $0.43

La Jolla/UTC $0.32 $5.96$0.08$0.10$1.07$0.26$0.88$1.05$0.56$0.62$0.59 $0.43



North County $0.55 $6.42$0.12$0.12$1.25$0.14$1.01$1.01$0.64$0.60$0.50 $0.48

North I-15 Corridor $1.05 $6.93$0.24$0.07$1.06$0.17$0.69$0.92$0.73$1.20$0.51 $0.29


Outlying San Diego… $0.98 $6.32$0.17$0.09$0.73$0.12$0.72$1.02$0.64$0.72$0.71 $0.42

Poway/Santee/Ram… $0.99 $6.38$0.16$0.09$0.74$0.15$0.74$1.00$0.64$0.72$0.73 $0.42

South I-15 Corridor $0.80 $6.60$0.23$0.08$1.25$0.18$0.72$0.92$0.65$0.94$0.53 $0.30



ConstructionSan Diego Multi-Family

Downtown is in the midst of a sustained developmentwave, with thousands of units under construction and inthe pipeline, and it has added some pressure toDowntown's fundamentals. The city's planning agencyhas pushed the Downtown Submarket through theenvironmental review process, cutting back theentitlement phase to less than six months. A significantportion of the metro's supply pipeline resides here, morethan 40% of the metro's current under-constructioninventory, and Downtown is expected to account forabout 40% of the metro's new supply in 2018, includingDowntown's biggest apartment community to date,Greystar's $400 million, 718-unit Park 12. But even withan admitted concern of undersupply, there's been nonoticeable uptick in new housing permits (including SFRand multifamily, even if the number of entitlements hastrended upward), with the level remaining relatively flatsince 2015 with about 10,000 annually. Meanwhile,lenders might be pulling back a bit, since loans areincreasingly being offered near 50% loan-to-cost, aratio that has only narrowed over the past several years.Earlier this cycle, it was closer to 75%–80%.

In 2020, the lease with the city for the Sport Arenaexpires. And when taken together with neighboring city-owned land—more than 40 acres in all—it's possible thisarea could be a focal point for revitalization. In fact, theCity Council approved a plan in 2018 that wouldfundamentally alter the area. The plan increases densityin the Midway District by re-zoning industrial land forhousing, increasing the number of housing units byupwards of 10,000. The plan anticipates significantinfrastructure improvements, a 30-acre park, andreliance on the Old Town Trolley station.

One interesting dynamic this cycle compared to the last

one is the size of new units. New communities arecoming to market with considerably smaller floor planson average as developers build out more expansivecommunity amenities. They are down nearly 50 SF, withone large factor being the number of studios. Last cyclesaw the delivery of only 400 studios total. In 2018 alone,developers delivered twice that number. With escalatingdevelopment costs and the higher price per square footachieved on smaller units, developers are likely tocontinue building studios, even if they have the highestvacancies.

All in all, the metro’s relative geographic constraints keepgrowth modest in comparison to most major metrosacross the country. An often exhaustive entitlementprocess (entitling a property for higher densities canoften drag on for years at considerable cost—permittingfees can run upwards of 40% of the development cost),neighborhood opposition to increased density, and thegenerally high cost of development are all barriers tooutsized growth. One developer recently noted that hardcosts associated with vertical construction have gone upalmost 50% in the past few years alone. Developersbringing new product to market have noted the difficultyin building for less than $300,000/unit with podiumconstruction often in the $300/SF range. Parkingrequirements, too, add to the development cost and oftenmake a project unfeasible. Building the necessaryparking can add up to 20% of developers' costs (rangingfrom $10,000 above ground to more than $90,000 belowground per space). With these added costs, workforcehousing becomes extremely difficult to pencil out. Andfinally, developers note the lack of labor for projects asbeing especially challenging—especially near bordercontrol stations—even as construction hiring is amongthe better-performing job sectors.


ConstructionSan Diego Multi-Family

DELIVERIES & DEMOLITIONS


SalesSan Diego Multi-Family

San Diego continues to be a target for deep-pocketedinvestors, although local parties are most active here,and both investment classes often target value-addopportunities. In 2018, roughly 25% of investment hasoriginated from institutional, private equity, or REITconcerns. That is up from the cycle average, which iscloser to 20%. Market cap rates are holding steady near5%. After surging to a 20-year high in sales volume in2017, investment through the first three quarters of 2018was down notably.

While volume in 2018 fell well short of 2017's haul, astring of large communities turned over. In December,Mira Bella Luxury Apartments in Mission Valley sold for$120 million ($414,053/unit), continuing the trend of theMission Valley Submarket being the primary target fordeep pocketed investors. Domain San Diego, in KearnyMesa, also sold in June. Magnolia Capital purchased the2012-built community for $132.5 million ($347,769/unit)at a 3.95% cap rate. Essex Property Trust hadpurchased the property in 2013 for $121 million. InAugust, Pravada and Alterra at Grossmont Trolley sold.TruAmerica purchased the leasehold interest in thelargest transit-oriented property in San Diego for $149.5million.

In one of San Diego's biggest trades in recent memory,American Assets Trust purchased Carmel Pacific Ridgein Mission Valley in May 2017 for $232 million($435,272/unit) at a 4.25% cap rate. The 4 Star, 533-unit community was built in 2013, and rents averaged$2900/month ($2.50/SF) when it sold. Another big dealinvolved SOFI Westview and SOFI Highlands. The twoproperties sold to Pacific Urban Residential in June 2017for $151 million. It was part of Pacific Urban's strategy in

2017 to spend approximately $800 million on multifamilyacquisitions in California. In September 2017, ArtemisReal Estate Partners purchased the newly brandedOlympus Corsair (formerly Broadstone Corsair). The new360-unit community sold for more than $130 million. Andin October, also in the Mission Valley Submarket, Avionat Spectrum sold for $140 million ($312,500/unit) at a5.5% cap rate. In 2017, nearly $850 million in assetstraded hands in Mission Valley alone.

Several sizable owners in San Diego peg their lack ofinterest in selling properties squarely on Proposition 13.With a large stable of investors to turn for capital whenpurchasing a property, that same pool is often reluctantto pick up the tax tab and, as such, would require a 1031exchange. By exchanging out of a property, they wouldostensibly be turning their lower fixed property tax status,assuming the property was held for any amount of time,into a considerably higher one as prices continue to growin the metro.

With the statewide effort to repeal Costa Hawkins comingup short in November 2018, investors who had remainedon the sidelines for much of the year may return andboost volume.

When Congress passed the Tax Cuts and Jobs Act in2017, it established a new community developmentprogram. The Opportunity Zones were established ineconomically distressed communities where newinvestments may be eligible for preferential tax treatment.They are designed to spur economic development andjob creation in the zones. In San Diego, one of thelargest zones is in National City.


Page 14

SalesSan Diego Multi-Family

SALES VOLUME & MARKET SALE PRICE PER UNIT


Page 15

Sales Past 12 MonthsSan Diego Multi-Family

Sale Comparables

481Avg. Price/Unit (thous.)

$254Average Price (mil.)

$5.6Average Vacancy at Sale

4.6%SALE COMPARABLE LOCATIONS

SALE COMPARABLES SUMMARY STATISTICS

Sales Attributes Low Average Median High

Sale Price $150,000 $5,612,898 $2,250,000 $132,500,000

Price Per Unit $5,859 $253,965 $224,375 $866,666

Cap Rate 1.8% 4.4% 4.4% 8.4%

Vacancy Rate at Sale 0% 4.6% 0% 47.4%

Time Since Sale in Months 0.1 5.8 5.7 11.9

Property Attributes Low Average Median High

Property Size in Units 5 19 8 416

Number of Floors 1 1 2 6

Average Unit SF 0 700 717 1,929

Year Built 1908 1966 1967 2018

Star Rating 2.1


Page 16

Sales Past 12 MonthsSan Diego Multi-Family

RECENT SIGNIFICANT SALES

Sale InformationProperty Information

RatingProperty Name/Address Yr Built Units Vacancy Sale Date Price Price/Unit Price/SF

8798 Spectrum Center Blvd- 2012

Domain San Diego1 381 3.7% 6/12/2018 $132,500,000 $347,769 $364

1850 Thibodo Rd- 2005

Sofi Shadowridge2 314 3.5% 6/4/2018 $115,000,000 $366,242 $382

8707-8747 Fletcher Pky- 2010

Alterra3 297 4.7% 8/10/2018 $102,704,337 $345,805 $254

5401 Baltimore Dr- 1980

Veranda La Mesa4 406 3.7% 12/5/2018 $99,400,000 $244,827 $334

10343 San Diego Mission Rd- 1979

Bella Posta5 344 4.4% 4/25/2018 $97,750,000 $284,156 $316

7084-7148 Friars Rd- 2008

Fashion Valley Luxury Apart…6 161 4.4% 10/26/2018 $70,750,000 $439,440 $402

570 E Barham Dr- 1988

Barham Villas Apartment Ho…7 168 6.0% 10/1/2018 $52,200,000 $310,714 $334

8605-8645 Fletcher Pky- 2009

Pravada at Grossmont Trolley…8 230 2.2% 8/10/2018 $46,795,663 $203,459 $221

3875 Main St- 2018

Stone Creek Apartments9 97 47.4% 6/15/2018 $32,450,000 $334,536 $433

7575 Linda Vista Rd- 1978

Verse10 116 6.0% 11/15/2018 $32,400,000 $279,310 $414

506 E Barham Dr- 1988

The Avenue at San Marcos11 84 3.6% 12/3/2018 $23,300,000 $277,380 $346

2070 Poplar Rd- 1989

Ocean Breeze12 72 1.4% 6/7/2018 $22,700,000 $315,277 $326

1907 Columbia St- 2012

Elan Luxo II13 40 5.0% 7/17/2018 $21,276,000 $531,900 $519

743 S Magnolia Ave- 1975

Village Green14 92 10.9% 6/22/2018 $17,900,000 $194,565 $163

10130 Austin Dr- 1976

Rancho de Sol15 74 12.2% 2/23/2018 $17,900,000 $241,891 $276

3964-3970 Waring Rd- 1980

Terra Oceanside Apartments16 62 2.4% 6/21/2018 $17,500,000 $282,258 $330

3964-3970 Waring Rd- 1980

Terra Oceanside Apartments16 62 2.4% 1/22/2018 $15,800,000 $254,838 $298

3265-3285 5th Ave- 2008

The 25 On Fifth17 25 8.0% 6/15/2018 $14,500,000 $580,000 $320

8420 Buckland St- 1973

Rimrock Apartments18 62 4.8% 5/24/2018 $14,100,000 $227,419 $323

4302 Palm Ave- 1972

Trolley Palm Apartments19 75 5.3% 8/31/2018 $14,000,000 $186,666 $205


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