The Condo Domino

Thursday, February 02, 2006 | On the corner of India and A streets in Little Italy, there’s a small parking lot with a big fancy billboard.

The billboard announces the forthcoming construction of another high-rise condo tower to the streets of downtown San Diego. An artist’s impression on the sign depicts “The Elle,” a 21-story, 191-condominium project, construction of which is set to begin in March 2005.

Underneath the billboard, there’s a less showy sign. It says simply “For Sale.”

The fact that Bay Structures LLC., a consortium of developers from Los Angeles, has decided to sell the planned-but-as-yet-un-built project, is the latest in a string of indicators that show the downtown condo market may have hit its high-water mark.

Of the 59 residential projects currently underway in downtown, experts are predicting that many will never crawl off the plans and stand in the already saturated condo market. The Elle is the first development to succumb to the realities of that market, they said, and more are sure to follow.

“It’s a little scary, no question,” said Joe Werner, COO of Intergulf Development, which has completed a number of condo projects in downtown San Diego. “The speculators who have driven the market to some extent are bailing out.”

It was unclear why Bay Structures decided to sell. Calls to the company were not returned.

The partnership has completed 75 percent of the building’s plans and has secured all the necessary permits. Tim Winslow, a broker with Grubb & Ellis Business Real Estate, who is selling the property, said the entire project – including land, designs and permits – is up for sale.

The sale is completely in line with the company’s business plan, Winslow said.

“Lenders are starting to see that it’s a little bit more risky venture and as a result they may be a little bit more hesitant,” Gin said.

The Elle is probably the first condo development to fall prey to wary lenders, a flattening condo market and spiraling construction costs, said Paul Tryon, CEO of the Building Industry Association in San Diego. Nevertheless, he said it’s common to see developers selling their projects while still in the planning phases, especially when a market begins to plateau after a period of strong growth.

“You see an acceleration of that in a market that’s going through some corrections or some changes,” he added.

Anthony Napoli, a Realtor in Little Italy, guessed that 35 to 40 percent of the 11,000 condo units in the pipeline for downtown San Diego will never be built in the current real estate climate. He said the superheated condo market of the last few years has attracted many people into the condo business who didn’t really know what they were doing.

“In the heyday, a monkey could be a developer in downtown,” Napoli said. “Now you will only get financing if you can show a real feasibility study.”

Russ Valone, president and CEO of MarketPointe Realty Advisors in San Diego, was characteristically upbeat despite the news of the Elle sale. He said the sale could be due to any number of reasons, from increasing construction costs to financing issues, and that it is not necessarily indicative of a weakening condo market.

However, Valone did say that the downtown condo market has become increasingly competitive, and that he can foresee a proportion of the planned condo units never making it off the ground.

That’s just a natural part of the market’s return to normal, Valone said, and it may prove to be little more than a temporary glitch. As developers find it more difficult to acquire the financing for projects, the existing inventory on the market will be bought up, he said, and soon enough, San Diego will face a “shortage” of condos again.

“That will be just a pothole in the road,” Valone said.

For existing condo owners, and Realtors, in downtown that’s not a bad thing.

“It would be better for property owners – people trying to sell their homes or increase their investment portfolio – if there wasn’t a constant dumping of new units on the marketplace,” said Jim Abbott a Realtor who lives and works downtown.

But Chris Thornberg, a senior analyst with the University of California, Los Angeles Anderson Forecast, said the important thing for owners, realtors and investors to consider is not the fact that the development has been put up for sale, but how quickly it sells.

“How fast will it get snapped up?” he said. “That’s what I would be watching.”

Please contact Will Carless directly at