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Thursday, March 1, 2007 | The list of niche products in San Diego housing development doesn’t stop with the urban condo with a view, or the suburban McMansion, or the beachfront luxury home.
New medium-sized homes on small lots suited for middle-income workers are so rare now they can be considered a niche, at least according to one real estate investment fund. “We’re a niche, the glamorous, sexy niche that it is,” quipped Jay Stark of the Phoenix Realty Group, which oversees the San Diego Smart Growth Fund.
It’s a type of housing that has all but fallen from the radar in new home construction, as materials and labor costs have risen and developers have found better profit margins building bigger homes in the suburbs. But some experts expect this niche to grow as the region’s cities embrace denser neighborhoods and a reduction in freeway traffic.
The deficiency of affordable housing units in San Diego has the region’s governments struggling to entice developers to build housing units at lower prices. But governmental intervention into a housing market already saddled with dipping prices and slowing sales has proven controversial. Governments give incentives like land, loans, grants and freedom from traditional regulation in exchange for builders including a certain number of price-restricted units in their projects
But one private real estate investment fund is producing a housing project geared for the middle-income earners of the county, like nurses and firefighters — without using government dollars.
“We’re focused on building affordable housing — ‘little a’ versus ‘big A,’” Stark said.
The fund, called the San Diego Smart Growth Fund, contributed $4.3 million of initial capital toward a project called Granite Hills Village in El Cajon, which began construction last month. Cardiff-based Shoreline Communities is developing the project near the intersection of Washington Avenue and Jamacha Road, which will hold 57 detached homes priced near $599,000.
But $599,000 is still out of reach for many of the county’s workers. Less than one-quarter of the county’s households earn more than $100,000 annually, according to Census numbers from 2005. Representatives for the Smart Growth Fund say its goal is to build housing attainable by households earning between 80 and 200 percent of the area’s median income.
That range is about $55,200 to $130,000 annually for a family of four, based on 2006 U.S. Housing and Urban Development estimates for San Diego. To stave off speculators, the homes will be available only to households earning below that 200 percent level for 90 days at the start of the sales period, fund managers say.
“We’re making sure that there’s a window where they get to be priority,” said Tammi Harpster, a senior vice president at Phoenix Realty Group. “We’re targeting those people who need it the most.”
Government-sponsored affordable housing projects often maintain similar income-designated prices for at least a decade, restricting or monitoring future sales prices so the home remains in the affordable housing stock.
For the Granite Hills Village project, the buyers who will likely be able to afford these homes will be right at the top of that range, Stark said. Many developers, both for- and non-profit, take advantage of subsidies for low-income housing, and many more still develop luxury homes with prices north of $800,000, he said.
“We’re trying to hit the thick middle of middle-income people — who are making some money — but who aren’t able to afford the 800s,” Stark said.
Harpster acknowledged that the homes would still prove beyond reach for a large portion of San Diego working households, but the costs associated with the project — and the nature of the fund — dictate the price point they’ve set.
The San Diego Smart Growth Fund was created in May 2005 and had raised $90 million by November that same year from Washington Mutual, Northwestern Mutual and a $60-million investment from the California Public Employees’ Retirement System. As an investment fund co-managed by Phoenix Realty Group and the San Diego Capital Collaborative, the managers claim they’re committed to a “double bottom line” of economic return for their backers and social benefit in the communities they’re developing.
Fund managers project a percentage economic return in the “high teens” for the fund’s investors and emphasize their financial return is the ultimate priority, beyond altruism.
“As fiduciaries for our institutional investors, we have to go into a project knowing it will make financial sense,” Stark said. “If they’re just going to give away the money, they don’t need us.”
Of course, the fund also must share profits with those who build the homes. The fund puts up the initial capital, secures financing for the construction, and brings a developer on board to build the project.
Shoreline Communities is developing this project. Those 57 homes will range between 1,724 and 2,000 square feet, and be set on lots ranging between roughly 3,500 and 4,200 square feet, Stark said. With its $4.3 million investment, the fund also took out a loan to purchase the 6.4-acre site for $13 million. The land already had lots divided and through the city’s permitting process when the fund acquired the property last summer, Stark said. The land price breaks down to a price of more than $225,000 each for each lot.
“The developer economics and our economics are different,” Stark said. “So it’s the same (of the) share profit, but different share (of the) investment.”
Stark said that’s not necessarily a problem — it’s the fund’s responsibility to make sure the housing fits the social benefit bottom line, not the developer’s. When developers have grown accustomed to building houses between 2,300 and 2,500 square feet in the suburbs, they have to be enticed somehow to build a smaller home in a higher-traffic neighborhood.
“We’re putting up the capital to incentivize them to do this type [of housing],” he said. “We put up the equity; they put up the sweat.”
La Mesa-based real estate appraiser Sara Schwarzentraub questions the ability or desire of working families to purchase in the new project. The cost seems high for middle-class households in East County, she said, and the lots are small.
“That’s a footprint and a patio and that’s it,” she said of the lot size. But she said the price of land and entitlements is part of what has driven housing prices so high.
Peter Armstrong is a project manager at the San Diego Housing Commission, which funnels federal funding into mostly for-rent affordable projects in San Diego. He said the commission’s funding mostly goes to help households making at or below 60 percent of the median — a range of around $40,000 for a family of four. He said it’s a good thing there’s a fund like this striving to meet the middle market between low-income and luxury housing.
And in today’s high-priced housing market, the word “affordable” is relative, Armstrong said.
“In affordable housing, it all depends on who you ask,” he said.
Peter Dennehy, a local real estate analyst, agreed.
“Relatively speaking, they are affordable,” he said of the project’s homes. “In return, they’re not big houses, and they’re in a less desirable location.”
Dennehy predicts this niche will grow in the next few years as county residents grow weary of renting or commuting from nearby Riverside County, where housing prices are cheaper.
“Builders have placed more of a focus on first-time buyers,” he said. “Entry-level houses are in demand. If you’re a teacher, you can’t commute every day from Temecula.”
Barry Schultz is the CEO of the San Diego Capital Collaborative, a partner in the Smart Growth Fund. He’s responsible for making sure the social benefit bottom line is met for the fund’s investments, and also chairs the city of San Diego’s Planning Commission.
“The recognition from San Diego is that this workforce housing issue is becoming more and more important as the city tries to compete, to attract jobs and companies here,” he said. “This is more than just a social policy. The city recognizes that it’s a vital component of its health.”
Stark believes the gap between middle-class wages and housing prices will start to diminish as the average age of a first-time homebuyer creeps up.
“People are delaying homeownership because they’re changing jobs, having fun, continuing education,” he said. “So people are starting to be in their jobs for 10 years before buying a home.”
The fund’s parent firm, the Phoenix Realty Group, has been involved in several public-private partnerships that tap governmental funds for including rent- or price-restricted units for lower-income renters or buyers, Stark said. For this particular El Cajon project, however, the fund’s managers wanted to allow the homebuyers to make the kind of money on real estate their parents might have made on their homes over the years.
Stark said the fact that the city of El Cajon, inherent in its planning guidelines, allows these kinds of homes on small lots to be built in the first place can be considered encouragement of more affordable housing development, even though it doesn’t fit the government-grant subsidy category.
“You can’t look at public subsidy just as dollars,” Stark said. “There’s a city subsidy embedded in the entitlements.”
Jim Griffin, El Cajon’s director of community development, said the project wasn’t given any special treatment when it passed the planning stages, at which time it was owned by developer Daryl Priest. It is considered a market-rate project, he said, and mentioned another project Priest is developing — townhouses for about $319,000 in downtown.
The $500,000-$600,000 range price seems a little high for El Cajon, Griffin said.
“That’s up there,” he said. “But who knows anymore? Nothing seems to make any sense.”