San Diego’s Multifamily Reset

Four years ago, San Diego multifamily was priced for a world that no longer exists. We’re now in the middle of the correction back to a market priced on actual supply and demand, and it isn’t happening evenly across the country.

Rates were low, rents were climbing 8 to 10 percent a year, and buyers underwriting deals in 2021 and 2022 largely assumed both would continue indefinitely. That assumption drove pricing to levels that, in hindsight, were an anomaly. Here’s what’s actually driving Q3 2026 numbers, and what it means depending on where your property sits.

The 2022 Peak, In Perspective

Debt got expensive fast

Agency multifamily debt started 2022 in the high 3% to low 4% range. A holdover from pandemic-era conditions. By the end of that year, after the Fed’s fastest hiking cycle in four decades, the same debt was priced in the 6.0% to 6.5% range.

Cap rates haven’t caught up to reality until now.

Cap rates compressed into the 3.5% to 4.5% range across much of the county during that window, which only works if debt stays cheap and rent growth stays elevated indefinitely, and neither held. Today’s active buyer pool is underwriting to yield requirements closer to 5.5% to 6.0%, using current debt costs and realistic rent assumptions.

That gap between old pricing logic and current underwriting is the single biggest driver of the repricing we’re seeing across the country.

San Diego Is No Longer Supply-Constrained

For decades, the investment case for San Diego multifamily rested on scarcity. Tight zoning, slow entitlements, and coastal restrictions kept new supply chronically behind demand. And that scarcity is a big part of why cap rates ran tight and rents climbed reliably for years. That premise has broken down over the past five years. We’d argue it’s now a bigger structural driver of softening rents and values than interest rates alone.

Two supply channels are converging at once.

Large-scale construction:

The city delivered roughly 6,200 new apartment units in 2025. The highest annual total in 25 years, against a historical absorption pace of around 3,000 net move-ins a year. Another ~4,000 units are scheduled for 2026. With roughly 11,800 units still under construction as of Q2 2026.

The ADU boom:

San Diego County issued 3,991 ADU permits in 2024, up 247% since 2020. North Park, Hillcrest, University Heights, and greater Uptown are among the most active corridors, and a new state transit density law taking effect mid-2026 (SB 79) is set to make ADU and JADU development even easier in exactly these neighborhoods.

North Park and Hillcrest were, for a generation, considered essentially built out. That’s no longer true, and the old assumption that scarcity would eventually pull rents and values back up needs updating for these submarkets. In North Park specifically, rents are softening for a concrete, countable reason: there are simply more units chasing the same renters than there were five years ago.

A New Wrinkle: Rate Uncertainty From Overseas

Layered on top of the post-2022 repricing is a geopolitical shock that’s kept the rate outlook unsettled all year. The US-Israel conflict with Iran, which began in late February 2026, closed the Strait of Hormuz to Western allied shipping and sent oil prices sharply higher. Rather than delivering the rate cuts broadly expected at the start of the year, the Fed has held its policy rate steady. And at a few points this spring, bond markets briefly priced in the odds of a hike rather than a cut.

For commercial real estate, this shows up less as a physical disruption and more as an overlay on financing costs and buyer risk appetite. It doesn’t change San Diego’s underlying supply-and-demand picture, but it’s a real reason some buyers are pausing or building in extra caution right now. Buyer conviction in rent growth and long-term scarcity, still strong in coastal, supply-constrained pockets like Pacific Beach, is driving pricing in ways not available everywhere. In submarkets with a deeper bench of comparable listings, like North Park and Hillcrest, buyers are pricing strictly off current cash flow and current debt costs.

Where We’re Seeing Friction, and What We’re Telling Sellers

The sellers who are struggling to trade right now are, in almost every case, holding on to past pricing expectations. Here’s what we’re seeing play out in real time:

• Listings priced to old comps are sitting stale. Every week on the market for 60 to 90 days trains buyers to assume there’s a problem with the property, not just the price. And the eventual sale price ends up lower than it would have been if it had been priced correctly from day one.
• Buyers are underwriting today’s debt costs, not last year’s. A price that pencils out at a 2022 interest rate simply won’t clear today’s buyer pool, regardless of how good the real estate is.
• Overpricing is now the primary cause of failed and re-traded deals. We’re seeing far more transactions unwind or get renegotiated during escrow. Usually because the seller anchored too high and the appraisal or the buyer’s final underwriting brings reality back into the deal on worse terms.

Our recommendation to owners considering a sale in the next two to three quarters: price to today’s cap rate and debt environment for your specific submarket. Not to what a comparable building sold for last year. Pacific Beach owners have more room to hold firm; the data support it. North Park and comparable inland or urban-infill owners generally do not, and pricing aggressively from the outset is what’s producing the fastest, cleanest closings we’re seeing today.

Where there’s a genuine gap between what a seller needs and what the market will pay, that doesn’t have to mean walking away from a sale. We’ve been having more conversations lately about seller financing, 1031 exchanges, and Section 453 installment sale structures, which can bridge part of that gap, defer tax exposure, and provide a seller a path to their number over time. As always, the numbers on any pricing conversation are best discussed over the phone or in person.

What This Means for Your Portfolio

If you’re planning to hold, the fundamentals underneath this remain sound: vacancy is still low by national standards, and the construction pipeline, while elevated, is contracting. If you’re planning to sell in the next few quarters, the market is telling us clearly that pricing discipline, grounded in your specific submarket’s current data. Rather than 2022 memory, is what separates a transaction that closes from one that lingers.

We’re happy to run a current, submarket-specific valuation on any property in your portfolio. That way you’re making that decision with today’s numbers, not last cycle’s.

The Bottom Line

The 2022 pricing logic doesn’t clear in this market. Cap rates, debt costs, and a wave of new supply have permanently reset what a deal needs to look like to close. Coastal, supply-constrained pockets like Pacific Beach still have room to hold firm. North Park, Hillcrest, and comparable inland or urban-infill submarkets don’t. And pricing to today’s numbers, not last year’s comps, is what’s actually getting deals done.

Talk Pricing Strategy With Our Team

Whether you’re holding, selling, or somewhere in between, we’re glad to talk through pricing strategy, timing, and structure for your specific property. Contact Mendes Company today to schedule a consultation.