Invest With MeIt’s been widely reported that San Diego is experiencing some of the worst of the housing crisis in America, with median home prices hovering around $930k and median rent at $3,400 (Zillow,n.d.). And the problem is only getting worse. San Diego saw some of the highest rent growth in the state over the last year at 2.7% and historically low vacancy at 3.5% (Witthaus, Burke, Drummer & Hirsh, 2023). So why is it getting worse? The upward pressure on housing costs can be attributed to two things: increased demand due to record job growth and limited supply.
Thriving Biotech Sector and Growing Military Presence: Fueling San Diego’s Soaring Job Growth and Housing Demand
San Diego has seen historic job growth of 4.9% annually, outdoing the national average of 4.6% (Ohl, 2022). The largest sector responsible for so much growth is undoubtedly biotech. San Diego is the third largest biotech hub in the country, and it’s only growing. In fact, the state of California’s Employment Development Department estimates that through 2024, 22.2% of all job listings requiring a doctoral degree will be for biochemists and biophysicists, and 40.2% of all job openings requiring a bachelor’s degree will be for biomedical engineers (State of California Employment Development Department, 2016). Biotech firms accounted for 15% of all new office and industrial leasing in 2021 (source: costar). An estimated 1.8 million square feet of office and lab space will be completed in downtown San Diego in 2023 alone.
The growing military presence is another contributor to the growing demand. San Diego is already ranked #1 in the concentration of military/defense assets in the world (City of San Diego official website, n.d.), and that presence is only growing. The growing threat of China in the Indo-Pacific region has led to a growing focus on increasing defense in the Pacific in what military advisors and former President Obama have declared “The Pacific Pivot” (Garman, 2022). The Pacific Pivot will lead to job growth for military personnel and contractors in the decades to come, further exacerbating the demand for housing.
Geographical Constraints and Insufficient Building Efforts Compound the Problem
The crux of the problem is San Diego isn’t and can’t build enough new housing to meet the rising demand. San Diego has the least amount of flat, buildable land in the country. It’s geographically constrained by the Pacific Ocean to the west, mountainous terrain to the east, Mexico to the south, and Camp Pendleton military base to the north. All of the mesas have been built on, so the number of empty lots has dwindled to near zero.
According to San Diego’s Association of Governments (SANDAG, 2022), the city will need to build 18,000 new housing units each year through 2029 to meet its housing goals of 108,036 new units. The problem is the city isn’t anywhere close to meeting that goal. In 2021, the city only approved 5,033 new housing permits. In order to meet its goal, the city will need to increase its housing development by over 300% annually.
Joshua Ohl, senior director of market analytics for CoStar Group in San Diego stated “Construction activity has remained relatively consistent in San Diego, which is to say that it has not been enough. San Diego could feel the impact of even fewer supply additions in the coming years with fewer properties going vertical in the present.
What’s the solution?
With the lack of vacant land the city truly only has one choice, going vertical and increasing density. California has led the way in developing programs to increase density with accessory dwelling units (ADUs), which allow single-family and multifamily zoned lots to construct additional rental units, so a single-family home can typically add 1-3 additional units.
In 2019, San Diego recognized the need to go beyond the statewide regulations to meet its housing goals and became the first city in the country to incorporate higher-density ADU regulations, allowing for unlimited ADUs up to the floor area ratio of the lot. In essence, this can allow for the addition of 10 or more units on qualifying lots.
San Diego’s ADU regulations are undoubtedly becoming a huge part of the solution. In 2021, ADUs made up 19% of all new housing unit permits (SANDAG, 2022).
NIMBYs
But the largest barrier to the city’s housing needs is without a doubt NIMBYs (not in my backyard). NIMBY refers to residents that push back, and oftentimes sue the city, in an effort to keep their neighborhoods the same. NIMBYs have pushed hard against regulations allowing for increased density. For decades, NIMBY residents have banded together to sue developers and stop new housing construction using municipal codes that allow for greater density. The NIMBY concern is always the same, they don’t want more traffic, less parking, and want to avoid the “Miamification” of California’s coastline.
As an example, residents of Rancho Penasquitos, a neighborhood north of downtown San Diego, have banded together to stop a proposed 1,400-unit neighborhood. They cite damages to the “community character,” school overcrowding, and challenges to the surrounding infrastructure as their basis for blocking the construction (Garrick, 2020).
Doctor Norm Miller, former professor and the Ernest Hahn Chair of Real Estate Finance at the University of San Diego stated “The typical mantra at most public hearings by local politicians that want to be re-elected echoes NIMBYs stating a desire to preserve character, protect the environment, and keep traffic and parking manageable. Overriding constituents and insisting on greater housing density or taller buildings requires more courage than most local representatives possess, so they do what keeps them in office, even with all the state pressure for more housing and various Senate bills with marginal impact.”
With the housing crisis getting worse, even Governor Newson has become vocal against NIMBYism. In a recent interview with the San Francisco Chronicle, Newson said “NIMBYism is destroying the state,” (Bollag, 2022) The state has to make a decision on what is more important: catering to the NIMBYs and preventing the city from growing, or developing homes to meet housing needs.
Conclusions
The issues causing San Diego’s enormous housing problem can be boiled down to the forces of supply and demand. There’s no question the city is growing and demand for housing is far outpacing the supply. It’s not possible for the city to stay the same size forever. The only option to increase affordable housing is to increase the supply and density of housing.
ADUs are becoming a significant part of the solution, as they not only increase housing, but they reduce urban sprawl and contribute to sustainability. ADUs also provide a massive opportunity for investors and developers, which is why my investment focus is on developing ADUs in the San Diego region for years to come, and while it’s understandable that residents prefer less traffic and fewer neighbors, economic policy cannot continue to prioritize catering to wealthy homeowners that don’t want to see change. The fact of the matter is San Diego is growing and cannot maintain the same small-town vibes it was cherished for in the past.
There truly only is one path to fixing this, ADUs and incentives for developers to build higher in San Diego.
I wrote an entire eBook on ADUs in San Diego titled “California Gold,” which you can download for free at investorshawn.com or by clicking this link.
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References
- Zillow. (n.d.). San Diego, CA 54296 Home Values. Retrieved from https://www.zillow.com/home-values/54296/san-diego-ca/
- Witthaus, J., Burke, K., Drummer, R., & Hirsh, L. (2023, July 25). [Title of the Article]. CoStar News. Retrieved from https://product.costar.com/home/news/1427493291
- Ohl, J. (2022, January 25). [Title of the Article]. CoStar News. Retrieved from https://product.costar.com/home/news/493616866
- State of California Employment Development Department. (December 2016). [2014-2024 Projection Highlights San Diego-Carlsbad Metropolitan Statistical Area (San Diego County)]. Retrieved from https://labormarketinfo.edd.ca.gov/file/indproj/sand$_highlights.pdf
- City of San Diego Official Website. (n.d.). Retrieved from https://www.sandiego.gov/economic-development/sandiego/facts
- Garman, K. (2022, May). Reinvigorating Pacific Pivot: Climate Change and Soft Power. Proceedings, 148(5), 1,431. Retrieved from https://www.usni.org/magazines/proceedings/2022/may/reinvigorating-pacific-pivot-climate-change-and-soft-power
- City of San Diego Association of Governments (SANDAG). (2022). 2022 Annual Report on Homes [PDF document]. Retrieved from
https://www.sandiego.gov/sites/default/files/2022_annual_report_on_homes_oct_update.pdf - Garrick, D. (2020, February 21). Rancho Penasquitos emerging as new battleground for local housing crisis. San Diego Union-Tribune. Retrieved from https://www.sandiegouniontribune.com/communities/san-diego/story/2020-02-21/rancho-penasquitos-emerging-as-new-battleground-for-local-housing-crisis
- Bollag, S. (2022, May 22). Newsom proposes new housing accountability measure. San Francisco Chronicle. Retrieved from https://www.sfchronicle.com/politics/article/newsom-housing-17188515.php
