San Diego Real Estate: Stay the Course or Shift Markets?

Overview

In today’s evolving market, many investors are revisiting a pivotal question:

“Should I continue building in San Diego—or is it time to reallocate my equity into another market?”

There’s no universal answer. Each strategy—holding, repositioning, or exchanging—comes with its own trade-offs depending on your income needs, appreciation outlook, and risk profile. Here's how investors are thinking about both paths:

Why Investors Are Exchanging Out of San Diego

1. Compressed Cap Rates

San Diego’s multifamily assets are trading at lower yields—averaging 4.6% citywide and dipping to 4.4% for premium properties (CoStar). Meanwhile, markets like Oklahoma City, Cincinnati, and Indianapolis report average cap rates near 6%, offering stronger cash-on-cash returns.

2. Built-Up Equity—Ready to Redeploy

According to the Federal Housing Finance Agency's All-Transactions House Price Index for the San Diego-Chula Vista-Carlsbad MSA, the index value increased from approximately 130 in Q1 2000 to 567.58 in Q4 2024. This represents a total increase of about 336% over the 25-year period. With property values rising over 300% since 2000 in many core submarkets, long-time owners are sitting on substantial unrealized gains. Many are leveraging 1031 exchanges to roll equity into higher-yielding, lower-cost markets—without triggering capital gains tax. 

3. Rising Operating Costs

Operating expenses in San Diego have surged, eating into margins for many multifamily owners. Insurance premiums are up significantly due to statewide carrier pullbacks, with some policies increasing by 30–70%. Property taxes reset upon sale or after improvements, while rising utility rates and new compliance mandates add pressure. Labor shortages and higher vendor costs have also made maintenance and turnover more expensive. These rising costs are prompting some investors to question whether San Diego still delivers the cash flow it once did. 

4. Changing Regulations & Entitlement Risk

Programs like San Diego’s Bonus ADU initiative are under scrutiny, with new proposals to limit parking exemptions, especially outside of Transit Priority Areas. In high-fire-risk zones, bonus density may soon be off the table altogether. This creates entitlement risk for owners banking on future density—pushing some to lock in gains now.

5. Clarifying Investment Goals

With rising costs and compressed returns, many investors are reassessing whether San Diego still aligns with their goals. Those prioritizing cash flow are increasingly drawn to markets where yields are higher despite added risk. Others are eyeing cities for a balance of value-add upside and growth. San Diego may still make sense for long-term appreciation, but for those seeking higher income or portfolio diversification, reallocating equity elsewhere is becoming more appealing. The decision often comes down to your goals between stability, returns, and involvement.

6. Geographic Diversification

San Diego remains one of the most competitive real estate markets in the country—ranked No. 19 on Zillow’s list of hottest markets for 2025. That competitiveness is creating a high barrier to entry for new investors and compressing returns for those focused on yield. In contrast, secondary and emerging markets—where institutional capital is lighter and price points are lower—offer more room to negotiate, scale, and optimize cash flow. For investors prioritizing immediate income or looking to stretch their capital further, exploring less saturated metros may provide better upside and flexibility. 

7. Alternative Asset Strategies

Some are redirecting equity into specialized vehicles:

• Development projects

• Triple Net Leases (NNN)

• Delaware Statutory Trusts (DSTs)

• Boutique hotels or STR portfolios

• Syndications or private placement deals

These approaches allow for diversification, passive income, and creative tax advantages. 

If any of this has you rethinking your current strategy—don’t worry, you’re not alone. We help investors navigate decisions like these every day. If you’re curious how this all applies to your portfolio, we’re always down to talk shop—and yes, we’ve included a Calendly link (RIGHT HERE)—because constant emails back and forth to schedule a time isn’t the best use of anyone’s time. 

Why Other Investors Are Staying Put in San Diego

1. Geography = Built-In Scarcity

San Diego’s developable land is boxed in:

• North: Camp Pendleton

• South: Mexico

• West: The Pacific Ocean

• East: Mountains and protected habitat

Only ~2% of city land remains undeveloped, per SANDAG. Scarcity + demand = long-term asset value.

2. A High-Demand Economic Base

San Diego is anchored by world-class industries:

• Life Sciences: Illumina, Thermo Fisher

• Defense: General Atomics, Northrop Grumman

• Tech: Qualcomm, Apple’s growing San Diego division (Reference HERE)

This drives stable, high-earning tenants—fueling long-term rental demand.

3. Strong Exit Liquidity

In constrained coastal markets like San Diego, well-located multifamily assets rarely sit vacant for long. High buyer demand, favorable lending markets, and limited new inventory create reliable exit paths—especially in upcycles. With consistent buyer demand and limited inventory, San Diego remains a market with strong exit liquidity—an important factor for investors navigating 1031 exchanges. 

4. Development-Friendly Incentives

Here’s what San Diego owners are tapping into:

• Transit Priority Areas (TPA) – No parking requirement near transit

• Complete Communities – FAR bonuses & fee waivers

• Opportunity Zones – Capital gains deferral (through a QOF)

• Sustainable Development Areas (SDA) – Streamlined permitting

• Transit Overlay Zones – Density support for infill locations

These programs unlock value without ever selling the dirt (More to come in the next CCG Insights, where we’ll break this down in greater detail).

5. Creative Strategies Without Selling

Owners who don’t want to sell—but want better returns—have options:

• Add ADUs or micro-units

• Convert to short- or mid-term rentals

• Refinance to unlock equity

• Pursue adaptive reuse or co-living models

At CCG, we work with vetted local contractors, lenders, ADU consultants, and management teams to help you maximize income and minimize hassle—all while retaining ownership. 

San Diego vs Austin 4-Unit Case Study Example

Over the past 25 years, both markets have experienced significant appreciation, with San Diego's multifamily properties seeing increases of over 300%, while Austin's have appreciated by approximately 200% to 250%. Let’s say an investor purchased a 4-unit property in San Diego back in 2000 for $400,000, putting 20% down:

Financial Snapshot (San Diego 4-Unit)

• Down Payment: $80,000

• Loan Amount: $320,000

• Interest Rate (2000 Avg): ~7.5%

• Monthly Mortgage Payment: ~$2,237

Over 24 Years (2000–2024)

• Property Value Today: ~$1.6 million

• Total Appreciation: +$1.2 million

• Estimated Total Rent Collected: ~$2,304,000

• Total Depreciation Benefit (Tax Shelter): ~$279,273

What It Means

• Lower cash flow, especially early on due to higher property taxes and insurance.

• But long-term equity growth and tax benefits created significantly more wealth.

• Ideal for investors focused on appreciation, leverage, and tax optimization.

Now compare that to a 4-unit in Austin purchased in 2000 for $200,000, also with 20% down:

Financial Snapshot (Austin 4-Unit)

• Down Payment: $40,000

• Loan Amount: $160,000

• Interest Rate (2000 Avg): ~7.5%

• Monthly Mortgage Payment: ~$1,119

Over 24 Years (2000–2024)

• Property Value Today: ~$600,000

• Total Appreciation: +$400,000

• Estimated Total Rent Collected: ~$1,152,000

• Total Depreciation Benefit (Tax Shelter): ~$139,636

What It Means

• Higher monthly cash flow and lower carrying costs.

• More predictable returns, ideal for investors seeking income today over equity tomorrow.

• But overall wealth creation was 1/3 of the San Diego property.

The Bigger Picture

San Diego's tight margins can deter yield-focused investors—but the compounding power of appreciation and depreciation often delivers higher total returns over time. The Austin model is great for low-maintenance income, while San Diego rewards those who think long-term and leverage equity. While Austin’s cash flow was stronger, San Diego’s compounded wealth effect, especially when factoring in depreciation and leverage, often leads to greater overall return.

What’s Ahead: Key San Diego Market Updates

Even in a high-demand market like San Diego, local policy changes and planning decisions play a major role in shaping real estate outcomes. Here are some of the most impactful updates shaping the market in 2024:

The City of San Diego is currently reviewing proposed changes to its Bonus ADU Program, which previously allowed investors to build significantly more units in exchange for keeping some at affordable rates.

Key Concerns Under Review:

• Parking Requirements: New proposals suggest reinstating parking requirements for ADU developments located outside Transit Priority Areas (TPAs). State law continues to prohibit the city from imposing parking mandates within TPAs. ​

• Wildfire Zones: The city is considering eliminating the Bonus ADU Program's applicability in High and Very High Fire Hazard Severity Zones unless adequate emergency and evacuation routes exist. ​

• Transit Priority Areas (TPAs): While the city cannot require parking within TPAs due to state law, developments outside these areas may face new parking requirements, potentially impacting project feasibility in various zones. 

City staff are preparing a comprehensive package of ADU reforms, expected to be presented to the City Council in the summer of 2025. If approved, these changes could be implemented as early as early 2026. 

Housing permit issuance in San Diego dropped by roughly 25% year-over-year from 2022 to 2023, with 2024 pacing even slower in many submarkets. This decline spans both single-family and multifamily permits.

This trend is being driven by a combination of higher construction and insurance costs, longer approval timelines, and uncertainty around future rent growth. As a result, new housing starts are slowing, putting additional pressure on existing inventory.

New Growth Corridors: Hillcrest & University City

In a major step toward upzoning and increased density, the City Council approved comprehensive community plan updates for:

• Hillcrest (Mid-City area): Allows for 40,000+ new housing units over several decades, with new height allowances up to 20+ stories in key transit-oriented locations.

• University City: Rezoning focuses on high-density, mixed-use development around the trolley line, promoting transit-oriented growth and infill housing.

These areas are now positioned for significant land use transformation and infill development, supported by updated zoning that aligns with regional housing goals.

Conclusion 

Whether you're holding long-term in San Diego or exploring opportunities elsewhere, the current market demands clarity, not complacency. With appreciation, zoning shifts, and operating costs all evolving, now is the time to evaluate how your real estate is working for you.

There’s no one-size-fits-all strategy—just the one that aligns with your goals. Whether that means staying the course, repositioning within San Diego, or exchanging into a new market, having the right information—and the right team—can make all the difference.

Are You Ready to Evaluate Your Position?

There’s no perfect answer—only the one that aligns with your vision.

At CCG, we help investors:

• Run “Sell vs Hold” analysis scenarios

• Tap into off-market development & repositioning plays

• Identify high-yield markets for 1031 exchanges and future acquisitions

• Model tax impact, cash flow, and exchange vs. cash out scenarios

• Long-term ROI strategies 

Schedule a free strategy session HERE

References: 

• Arbor Realty Trust “Small Multifamily Metro Area Cap Rate Trends”
• CCG Real Estate Advisors “Massive Transformation Coming to Hillcrest & University City”
• Axios San Diego “New Housing Permits Down 25% Year-over-Year”
• Berkadia “2025 National Apartment Forecast Report”
• CoStar “San Diego Multifamily Cap Rate Trends”
• Federal Housing Finance Agency “All-Transactions House Price Index for San Diego-Chula Vista-Carlsbad, CA”
• Inside San Diego “Gloria Administration Proposes Reforms to ADU Density Bonus Program”
• Voice of San Diego “Fact Check: San Diego’s Death of Raw Land”