Zephyr CEO: Rental Multifamily Tapped Out in SD

Prices are surging and demand is at an all-time high, but Zephyr Partners CEO Brad Termini tells us the economic situation means apartment developers have nowhere to go but down.

Brad says he doesn't pretend to be an economist, but every project's financial success is dependent on achieving the highest rent in that market. In addition, he says results are dependent on lending interest rates remaining at today's level, and cap rates remaining at historic lows. “I don't think that situation will remain.”

Fundamentals still are holding up in San Diego, despite Brad's fears, according to a Marcus & Millichap report. With some 6,800 apartment units set to deliver between now and mid-2018 in San Diego, the report states that rents should have surged ahead by more than 8% this year. And local job growth, coupled with rising housing prices, will continue to push people to rent. But for Brad, apartment developers have been betting on this perfect storm of demand, low rates and plentiful lending that just doesn't look to last.

The company certainly isn't shying away from the housing industry. It's developing the luxe condo tower The Park at Bankers Hill and the South Cove townhouse mixed-use community in Dana Point. But as for Downtown San Diego, it's sold its Broadway land to Canadian developer Bosa Development, which plans to transform a 1950s-era retail and office block into a $250M towering condo mixed-use development between 7th and 8th avenues.

Brad says selling the land 18 months after buying it was caused by Bosa's “strong desire” to control that portion of Broadway. It's back out in the market for more development plays, eyeing land in Downtown as well as outside of San Diego. “We're typically focused on very unique supply-constrained markets where we are able to achieve extraordinary revenues to offset the costs of increasing rents and development.”