The Rate Cut Is Gone. Here Is What Actually Matters for Your Building.
Inflation just hit a three year high. The debate over why misses the point for San Diego apartment owners.
By Nick Hernandez ·
Yesterday morning the May inflation report landed at 4.2%, the highest reading since April 2023. If you have been waiting for a rate cut before making a move on your property, that wait just got longer. Futures markets that were pricing in cuts earlier this year now expect none in 2026, and some economists think the next Fed move could be a hike.
There is a debate playing out right now about what this number really means. It is worth understanding both sides, because the answer shapes how you should think about your building over the next 12 months.
Thanks for reading! Subscribe for free to receive new posts and support my work.
The two camps
The first camp says this is temporary. Look under the hood of the report and they have a point. Energy accounted for more than 60% of the monthly increase. Gas prices are up over 40% from a year ago, driven largely by the conflict with Iran. Strip out food and energy and core inflation is sitting at 2.9%, which is not far from where the Fed wants it. If the Iran situation resolves and oil comes back down, the headline number falls fast and we get back to talking about rate cuts. Gas prices have already dropped about 30 cents per gallon since late May, so there is early evidence for this view.
The second camp says the energy spike is a symptom, not the story. The real story is the tenant. Food is up 3.1% year over year. Electricity is up 5.9%. Medical care is running above 3%. Every line item in a renter’s budget is climbing at the same time, and wages in San Diego have not kept pace with what happened to rents between 2020 and 2025. In this view, the tenant base is approaching the ceiling of what it can pay, and no Fed decision changes that.
Here is my take. Both camps are probably right, and for owners of smaller apartment buildings in San Diego, it does not change the conclusion either way.
What the San Diego data is actually showing
Set the macro debate aside and look at what is happening on the ground here.
Average rents in San Diego are slightly negative year over year. Depending on the data source, the decline is somewhere between 0.8% and 2%. Active listings are up about 15% across the county. Landlords of big new buildings, especially downtown, are offering weeks of free rent to fill units. The county absorbed more than 10,000 new units over the past two years in a market that historically absorbs around 3,000 per year. That is why asking rents look flat while effective rents, the number after concessions, are quietly falling.
But here is the number that matters most for the people reading this newsletter. Vacancy in Class A luxury buildings is sitting around 6.6%. Vacancy in older Class B and C buildings is around 2.5%.
Read that again. The shiny new towers with the rooftop decks are the ones bleeding. The 1970s eight unit in North Park with parking and laundry is nearly full.
When tenants get squeezed by gas, groceries, and electricity, they do not stop renting. They move down market. They leave the $3,200 one bedroom with the concession and find the $2,200 one bedroom in an older building. The affordability problem that is hurting luxury product is the same force keeping workforce housing full. If you own the older, cheaper building, you are sitting in the strong seat.
The rent cap irony nobody is talking about
Here is a wrinkle specific to California owners. The AB 1482 rent cap is tied to CPI. The formula is 5% plus the regional CPI change. Because inflation came in hot, the maximum allowable increase for the 12 months starting August 1 is 8.2%.
So on paper, you can raise rents more than you have been able to in years. In practice, the market will not give it to you. With concessions everywhere and effective rents falling, pushing an 8.2% increase on a good tenant is how you create a vacancy in a market where the replacement tenant is harder to find than they were two years ago.
The gap between what is allowable and what is achievable has never been wider. The owners who get this right over the next year will price renewals to keep good tenants in place, not to capture every dollar the law permits. A 3% increase that a tenant accepts beats an 8% increase that triggers a move out, a month of vacancy, and a turn cost.
What to do with all of this
If you own a smaller apartment building in San Diego, here is how I would summarize the next 12 months.
Stop underwriting rent growth and start underwriting retention. The buildings that perform this year will be the ones with low turnover, not the ones with aggressive renewal pricing.
Know where your rents sit relative to the new supply. If your units are well below the new construction price point, you have a moat. If you own newer or recently renovated product priced near Class A levels, you are competing directly with buildings handing out six weeks free.
And keep one eye on 2027. Units under construction countywide fell 24% year over year. The supply wave that created all these concessions is receding, and the pipeline behind it is thin. The owners who hold through this stretch will likely be raising rents into a much tighter market in two to three years.
The Fed debate will resolve itself one way or another. Iran will or will not settle down. Either way, the fundamentals of your building come down to whether your tenants can comfortably pay your rent while everything else in their life gets more expensive. Right now, the data says the cheaper and older your product, the better positioned you are.
That is not something a rate cut can change, and it is not something a rate hike can take away.
I write about the San Diego apartment market for building owners. If you know someone who owns units here, feel free to forward this along.
Thanks for reading! Subscribe for free to receive new posts and support my work.