A Window of Opportunity for Multifamily Investors

While much of the attention in real estate remains focused on single-family housing, a potentially significant opportunity may be developing in San Diego's multifamily market over the next 6 to 24 months.

A combination of rising borrowing costs, slowing rents, increased vacancies, and a large wave of recently completed apartment construction is creating pressure on the multifamily market. For investors with money and patience, the coming years may present buying opportunities that have been largely absent for much of the past decade.

To understand why, it helps to understand that there are a few key factors at play: residential / commercial lending differences and a surge of new apartment construction recently completed or coming online later this year.

First, there is an important difference between residential and commercial lending. Most homeowners finance their properties with long-term fixed-rate loans, insulating them from changes in interest rates. Commercial real estate financing is structured differently. Multifamily and other commercial properties are often financed with loans that carry an initial fixed-rate period of five to ten years before adjusting to prevailing market rates. As these loans mature or reset, owners are forced to refinance in whatever interest rate environment exists at that time. Investors who acquired property in the historically low-interest rate environment of 2015 – 2023 are bracing for the impact of debt costs in 2026 which can be double or more the rate previously enjoyed.

Secondly, a surge of new construction has softened the overall market in San Diego. Many of the apartment projects currently coming online were conceived during the extraordinary market conditions of 2020 through 2022. Developers were attracted by historically low borrowing costs and rapid rent growth throughout San Diego County. As a result, permits for new multifamily construction surged and thousands of units entered the development pipeline. If you have driven through North Park or downtown San Diego recently, you have likely noticed the result. Approximately 10,000 new apartment units have been delivered over the past two years, compared to an historical average of roughly 3,000 units annually. Basic economics suggests that when supply increases faster than demand, pricing pressure follows. Rents have dipped roughly 2%, vacancy rates have doubled from the Covid era market, and units are taking longer to lease than they were just a few years ago.

Unlike single-family homes, multifamily properties derive much of their value from the income they produce. When rents decline and vacancies increase, property income falls. At the same time, many owners are facing refinancing at substantially higher interest rates than when the properties were acquired or developed. The combination can significantly compress cash flow and place pressure on asset values.

That does not mean San Diego's long-term outlook has changed. The region continues to face structural constraints on housing production due to land costs, construction expenses, regulatory hurdles, and a limited supply of large development sites. While recent zoning changes have encouraged additional housing production through ADUs and higher-density infill projects, rising interest rates will cap the flow of new construction and the market will rebalance.

In fact, the construction wave may already be slowing. Units currently under construction have reportedly fallen approximately 24% year over year. Even so, the effects of the recent supply surge are unlikely to resolve overnight. Depending on the submarket, landlords may continue to experience softer rents and elevated vacancies through 2027 and potentially beyond until the new units are rented.

When markets experience these types of temporary imbalances, opportunities can emerge. Sellers are frequently slow to adjust pricing expectations, but higher carrying costs and refinancing challenges can eventually force difficult decisions. For investors who are prepared to act, the next couple of years may offer opportunities to acquire quality multifamily assets at valuations that were difficult to find during the market's peak.

Jim Nelson has been selling real estate in Coronado for 16 years and is consistently ranked within the top 100 agents across San Diego County.