San Diego County has 360,000 apartment units, all occupied by persons who are not worried in the least about whether the apartment project they live in goes up or down in value, if their landlord has mortgage payment problems or if their building needs a new roof.

Apartment living isn’t for everyone, but almost half the folks in this region rent rather than own. Their selection of rentals ranges from single-family homes to condominiums to apartments of all types, sizes and rent levels.

What they all have in common is being nearly full. In fact, San Diego County is one of the nation’s most dependably full rental markets. Most Sun Belt markets experience wild swings in supply and demand. In the past few decades, markets like Orlando, Las Vegas, Phoenix and Houston have seen vacancy rates move from 5 percent in good times to as much as 15 percent to 20 percent in bad times. We have witnessed a multitude of markets offering two and three months of free rent as enticements in recent years.

We in San Diego County don’t know about these types of cyclical catastrophes and have seen nothing even remotely like them in years, maybe decades. For good reason. We are land constrained with most of our cities sporting an anti-apartment mentality. Getting approval to build apartments in many local cities is tantamount to trying to get a permit for an abattoir.

Most city councils act like renters are second-class citizens. What they know for sure is that the percent of renters who vote is distinctly less than homeowners. Therefore, voting against apartment construction is a no-brainer.

The supply of apartments has been declining the past few years because of the conversion craze. Our firm, MarketPointe Realty Advisors, has tracked more than 15,000 units that have been converted in the past five years. Admittedly, 75 percent of the converted units were sold to former renters, but the inventory of apartments is still less than it was five years ago.

Our county continues to grow by perhaps as many as 40,000 persons annually, thereby creating a demand for 15,000-plus housing units. Given the pricing of sale housing, most of those new folks are destined to remain renters.

This year, some new apartment construction will occur, as national firms like Avalon Bay, Archstone, Hanover and Fairfield, along with local firms like OliverMcMillan, H.G. Fenton and Garden Communities, will be building apartments. This year they could pull permits for as many as 2,500 new rental units. Without exception, the projects are all “A” quality, with corresponding rent levels. In this county, that means an average of $2-plus-per-square-foot; i.e a two-bedroom, two-bath 1,000-square-foot unit will be priced in excess of $2,000.

Most of these apartment builders are able to break ground because their property was originally going to be condominiums. However, with the condominium construction market at a near standstill, the land became available for apartments.

Downtown will definitely see a splurge of apartment construction. Hanover has two projects (one newly completed); OliverMcMillan three, maybe four, and a number of affordable projects are in the wind, virtually all subsidized by the Centre City Development Corp. and focused specifically on workforce housing – the folks that toil in the tourism industry and office towers.

CCDC deserves credit for authorizing $100 million for 2008 to improve Downtown. Two projects will begin construction this spring: one is 136 units by Father Joe/JMI/Lennar and Chelsea and the other is 275 units by Affirmed Housing and Housing Development Partners of San Diego at 15th Street and Imperial Avenue. A third will be 250 units in a high-rise at Ninth Avenue and Broadway. As none of these affordable projects “pencil out” without considerable public assistance, we applaud CCDC for stepping up with the funds.

As few, if any, condominium projects will start construction Downtown in the near future, it’s nice to know that there will still be construction going on in the form of rental apartments and hotels. I like seeing cranes in the air, even if they are not for $500,000-plus condominiums.

Back To Apartments

From an investment perspective, apartment projects are a much better buy than they were a couple of years ago when the conversion craze was in vogue. Capitalization rates have risen somewhat (“cap” rates are cash on cash percentage returns on properties – the higher the cap rate, the better the buy). And now that interest rates are subsiding, apartment investments in San Diego County almost make sense. Not perfect sense, but sense enough to warrant investment. Like single-family housing now, acquisitions require down payments, typically of 25 percent to 30 percent of the price. With a down payment of that amount, it may even be possible to have some cash from operations left over at the end of the year.

Investors want to know where they should buy in this county. I can honestly say there are very few places in this county where I would not buy. The quality of the neighborhood is reflected in the pricing so you pays your money and takes your choice.

The one factor that never changes is the need for top-flight management. Unlike triple net lease industrial space property that rarely needs inspection, apartments require active daily management and come equipped with average daily headaches.

The good news is that over the long run, an apartment project, if nurtured properly, will produce returns higher than almost any other type of investment property. It’s plain old Econ 101. The demand keeps rising and the supply doesn’t. That creates a long-term imbalance and that creates profits.

Alan N. Nevin is director of economic research with MarketPointe Realty Advisors (marketpointe.com), a consultancy providing real estate and demographic statistics, feasibility studies and litigation support to the California land use industry and legal professions. Nevin can be reached by e-mail at anevin@sandiegometro.com.