Homebuilding tanks in San Diego County

Mortgage

A historically low number of homes were built in San Diego County in the first three months of 2019.

There were 1,180 residential permits pulled in the first quarter, a drop of 58% compared to the same time last year, said the Real Estate Research Council of Southern California. It was the most significant drop of the seven Southern California counties.

The drop was largely the result of a reduction in the seemingly unstoppable apartment market. There were 556 multifamily permits pulled in the first quarter, a drop of 70% from 2018. While the apartment and condo market fluctuates heavily, because one approved project can mean hundreds of units, it was still notable because the apartment building pace had also slowed significantly at the end of last year.

Homebuilder sentiment

Bloomberg News

Analysts pointed to a slowdown in rent growth as the main reason for the reduction. Without a steady increase of 4% to 6% like the last few years, it’s getting harder for developers to make a strong return on investment with rising costs of construction, said Nathan Moeder, principal with real estate analysts London Moeder Advisors.

“Projects are having a hard time achieving feasibility so it means a lack of new projects in the pipeline,” he said. “Developers used to be able to count on long-term inflation of rents. But, we’ve pretty much hit a ceiling.”

Rents had increased at a rate of 2.7% annually as of the first quarter, said real estate tracker CoStar. That compares to 6.1% at the same time in 2017 and 4.6% in 2018.

Moeder said he doubted San Diego County would return to the levels of homebuilding seen in recent years, despite calls by housing advocates to increase supply. Even Mayor Kevin Faulconer’s latest proposal to increase housing density near transit stops, Moeder said, would mostly be smaller, in-fill projects — not the scale needed to address housing shortages.

Most of Southern California showed a drop in building in the first quarter. Only Riverside and Ventura counties showed an increase in residential permits. The only county to come near San Diego County’s plunge was San Bernardino County with a 30% drop in residential permits.

In a rare change, there were more single-family homes built in San Diego County. In the first quarter, permits were pulled for 624 single-family homes.

There has been statewide political pressure for more housing the past few years, but there has been little legislative success. A much talked about senate bill from state Sen. Scott Wiener, D-San Francisco, that had proposed increasing density near transit stops and high job areas did not move forward. It was shelved in May by a committee before it could get a vote from the whole state Senate.

Regardless of legislative fixes, the industry has faced increased construction costs that have slowed construction. Land, labor, regulatory fees, and materials have seen prices rise, said J. Kevin Mulhern, senior vice president of capital markets at CBRE.

“It’s pretty much across the board. It’s not any one thing. It’s a little bit of everything,” he said of costs. “The costs of new construction have continued to escalate very rapidly, quite a bit more rapidly than rents.”

Mulhern said it was likely there would be less multifamily building this year than 2018, but there were positive developments in the future. He said the San Diego Trolley extension to University City may open up new opportunities along the route, and community plans in Kearny Mesa and Mission Valley could make new construction easier once completed.

Borre Winckel, CEO of the local Building Industry Association, said challenges to home construction had been growing for years, and the public opposition to more density has not let up. He predicted the county would build fewer than 7,500 homes in 2019.

In San Diego County, there were 9,975 homes built in 2015, 9,972 in 2016, 9,580 in 2017 and 9,579 in 2018.

Statewide projections for the year are mixed for home building. The California Association of Realtors has anticipated fewer homes will be constructed than 2018, but the California Department of Finance and UCLA Business Forecasting Project have predicted more.


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