By Zane Willman, Associate Advisor | CCG Real Estate Advisors
For decades, California (San Diego especially) has been one of the most reliable engines of long-term real estate wealth in the U.S. A near-perfect climate, a top-tier workforce, world-leading industries, and chronic housing undersupply created the conditions for exceptional appreciation. San Diego home values alone have increased more than 300% since 2000, allowing many owners to build generational wealth simply by holding property.
But today, the tone of investor conversations has shifted. Many investors who previously viewed California as an automatic long-term hold are reconsidering future acquisitions, diversifying into other states, or trimming their exposure to local assets. Rather than a sudden exodus, what we’re seeing is a strategic recalibration as market conditions, regulatory frameworks, and growth expectations evolve.
A More Complex Landscape for Landlords
Landlord-tenant dynamics in California have always been more regulated than the national average, but recent changes have accelerated that trend. The Tenant Protection Act of 2019 (AB 1482) introduced statewide rent caps limiting most annual increases to 5% plus inflation and expanded just-cause eviction rules for tenants after 12 months of occupancy.
These protections were designed to stabilize housing costs, but they have significantly raised operational complexity for landlords. Eviction timelines, already slower than much of the country, now commonly stretch for months. During the pandemic, California maintained some of the nation’s longest eviction moratoriums, with certain jurisdictions such as Los Angeles extending protections into mid-2023.
Even after the pandemic, local legal structures make resolving disputes time-consuming and costly. Some cities offer tenants free legal representation, effectively turning routine cases into prolonged processes.
For institutional investors, these considerations are part of their underwriting model. But for small and mid-sized owners, who make up the majority of rental property operators in California, the risk of one problematic tenancy can significantly impact annual cash flow. More investors are asking: Is the operational load still worth the return?
Thin Margins and Financial Pressure
California has always been a low-yield, high-appreciation market. But when yields compress too far, even appreciation-driven investors reevaluate.
Cap rates for multifamily in San Diego continue to hover around the mid-4% to 5% range. Meanwhile, borrowing costs for investment properties still remain in the 5.5% to 6% range. This negative spread pushes leveraged buyers into break-even or negative cash flow unless they deploy significant equity upfront.
These thin margins are further tested by rising operating costs:
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Insurance premiums have surged 30–70% statewide, driven by wildfire losses and carrier withdrawals.
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Property taxes, while capped by Prop 13, reset to full market value at sale or major renovation meaning new buyers absorb substantial annual tax burdens.
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Labor, utilities, and materials have all risen as inflation and supply constraints impact building operations.
At the same time, rent growth has cooled. After a rapid run-up during 2021–2022, San Diego rents flattened in the second half of 2023. According to Axios San Diego (May 2024), year-over-year rent growth fell to approximately 1.6%, marking one of the slowest periods since before the pandemic.
Whereas owners once relied on 5–7% annual rent bumps to offset rising expenses, today’s environment demands far more careful underwriting.
Rising Risk
California’s insurance challenges have grown into a defining feature of the investor conversation. Major carriers like State Farm and Allstate stopped issuing new homeowner policies in the state due to wildfire exposure and regulatory limitations on rate adjustments. In 2024, State Farm announced it would not renew 72,000 existing policies.
For property owners, this translates into:
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Significantly higher insurance premiums
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Fewer carriers willing to insure multifamily assets
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Greater reliance on last-resort state programs with higher deductibles and limited coverage
In a risk-adjusted investment world, higher volatility demands higher returns. When yields are already thin, rising insurance costs weaken the investment thesis for some owners.
Policy Uncertainty and Shifting Development Rules
Regulatory uncertainty also plays a role in investor sentiment. California’s policy environment can shift quickly, making long-term planning more difficult.
For example, San Diego’s Bonus ADU program, which has driven significant small-scale infill development, is now under review with proposed changes targeting parking exemptions and density allowances in certain zones. For investors who purchased land based on previous entitlements, such changes introduce uncertainty around value, highest-and-best-use, and exit strategy.
Similarly, statewide discussions around property tax reform and local rent control expansions make some investors hesitant to deploy large amounts of capital.
Reevaluating Long-Term Appreciation
For 30 years, California’s appreciation masked low yields and high operating costs. That assumption is now being questioned.
Population trends have reversed. In 2023, California experienced a net out-migration of roughly 690,000 residents, the largest nationwide. Remote work has enabled high-income earners to relocate without sacrificing wages. Housing affordability long a strength for values has reached levels where demand is more constrained.
Investors are beginning to ask whether future appreciation will match the past, or whether California is simply becoming a slower-growth market.
San Diego as a Microcosm
San Diego remains one of the most desirable cities in the country, with diversified job drivers and limited land availability. Those fundamentals haven’t changed. But even here, investor behavior is shifting.
Many long-time owners with substantial equity are “taking chips off the table,” using 1031 exchanges to diversify into higher-yield markets while maintaining some presence in San Diego. Others are holding core properties but pausing new acquisitions until cap rates adjust or policy clarity improves.
San Diego continues to be a strong long-term hold—but investors are more measured and selective in their lending, underwriting, and overall strategy.
Our Takeaway
California real estate is not losing its appeal but the investment criteria have tightened. Rising costs, regulatory complexity, insurance volatility, and more modest growth expectations have pushed investors to reconsider growing their portfolio in California. Investors are not fleeing; they are recalibrating. Those who remain active buyers focus more heavily on underwriting discipline, operational efficiency, and long-term planning. If you’re weighing your long-term position in the San Diego market, schedule a call with CCG and we’ll help you evaluate your smartest strategic moves.
Sources:
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Chapman University / UCI – “California Losing High Earners & Business Owners” Study
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CapRadio – State Farm & Allstate Stop Accepting New CA Policies
