The Greater Salinas metroplex along the Pacific Coast of California holds unique opportunities for investors in multifamily real estate, with promising trends in vacancy rates and rent rates. Salinas consists of two areas; Inland Salinas and Monterey. Monterey is the more affluent of the two, while Inland Salinas offers more affordable housing options. For the purposes of this overview, we will focus on the greater metroplex and its most notable submarket, Monterey. A closer look at the overall real estate market offers greater insight into positive trends and how they relate to potential investment outcomes.
Vacancy rates in the Salinas metropolitan area remain low at approximately 2.8%, and the limited supply of units may ensure the ongoing demand for rentals in the area. Vacancies for higher-end units remain even lower, showing opportunities for growth to meet the need for 4-star and 5-star properties. The Monterey submarket is holding pace with the Greater Salinas area with a matching 2.8% vacancy rate, though the supply for desirable units remains even lower. Lower vacancy rates for multifamily rental properties in the market and submarket offer promise for potential investors.
Increases in rents for Salinas continue to increase at rates deemed reasonable by tenants while still keeping pace with the market. This is good news for investors who want a higher rate of return without driving tenants away. While the overall increase in rents for Salinas is steady at approximately 1.8%, the lower supply and greater demand in Monterey have commanded increases at around 4.3%. Effective rents for 3-star properties in both Salinas and its submarket of Monterey sit at about $2,100. While there are no reports for 4-star/5-star properties in Monterey for the most recent fiscal quarter, similar units in Greater Salinas come in at a respectable $2,500. Even more notable is the increase in Monterey rents over time, with a 61.4% increase over the last 10 years.
The building of new multifamily assets has been severely limited in Salinas, though this may be viewed as a positive with regard to the demand for units in relation to the current supply. No new units were added to the market over the last 12 months, and the trend for the last three years shows limited numbers of just three new units each year. There are opportunities for growth should construction projects get underway, particularly in Monterey where there is a lack of higher-end properties for new tenants to consider. A closer look at Monterey mirrors the trend of the overall area, with just 17 new units being delivered since 2003. With these numbers, it’s reasonable to assume that the stagnation in new construction is not necessarily as closely related to the pandemic and its associated material shortages/supply chain issues when compared to other metroplexes.
Sales in the Salinas area have been impacted by rising interest rates, with a noticeable slowdown occurring in 2022. Still, there have been several key sales to note, including the $13.3 million acquisition of an 84-unit property. The average cost per unit has increased to $279,349 from a previous 3-year average of $230,234. Appreciating prices despite increases in interest rates may be indicators of the overall market outlook for the area. The overwhelming majority of recent sales have taken place in Monterey, indicating strength in the market and underscoring the desirability of the area. Prices per unit in Monterey are higher than those in the Greater Salinas area, with a recent average of $300,000 compared to the previous 3-year average of $270,000.
Situated just south of San Jose along the Pacific coastline, Metropolitan Salinas is uniquely situated for renters looking for ideal weather and beautiful scenery. A diverse community adds to the desirability of the location. Monterey is home to a famed aquarium, gift shops, and other notable local businesses, further fueling the economy and the overall atmosphere in the area. Salinas, as well as its submarket of Monterey, were hit hard by the pandemic in terms of job losses due to the reliance on tourism and related retail and hospitality jobs. The housing bubble of the Great Recession also impacted the area, and those effects are still being felt. However, the return to business in a post-pandemic world provides hope for jobs and growth to return to the area.
While the area has been hit by both the pandemic and the Great Recession, there is potential for bouncing back in the Greater Salinas area. The unique geographical location and the diverse community both add to the richness of the region, and current rates in vacancies and rents highlight the possibilities for investors. A “return to normal” for tourism and retail may also be key to the future success of Salinas and its Monterey submarket. This is all good news for investors looking to build long-term growth with REITs or single-asset multifamily real estate properties.
*The information in this article is sourced from a CoStar market report dated 1/18/2023