Friday, Aug. 10, 2007 | While unsold condos pile up on the market, foreclosures mount and developers stall construction or try to sell projects entirely, it’s clear the region’s housing malaise has a home in downtown San Diego. Now, a snapshot of the market shows a sort of pause in the dramatic residential facelift downtown, as some of the best laid plans from the boom time grapple with a sapping of condo-buying fervor.
A regional housing boom catalyzed revitalization efforts downtown this decade. As it became a residential neighborhood, downtown increased its condo stock nearly fivefold in the last seven years. The downtown population has nearly doubled in that time, reaching an estimated 30,000 today compared to 17,500 in 2000.
But near the end of 2005, the fervor peaked countywide and downtown. In fourth quarter 2005, 387 new condos sold, according to DataQuick Information Systems. The next quarter, at the start of 2006, just 161 new units sold. And then 88 the next quarter. After a swing up, sales for new units downtown numbered 82 in second quarter 2007. That’s a little more than one-third as many as were sold in the same quarter two years ago.
“Right now, you’re not running into a sales office into that frenzy where you have to bid it up to get it,” said Russ Valone, a market analyst with MarketPointe Realty Advisors. “But we have to ask the question: Is, fundamentally, downtown a place where people want to live?”
Now, like the rest of the region, downtown has a growing stockpile of unsold homes. But where developers of suburban subdivisions elsewhere in the county have left swaths of land for subsequent construction undeveloped, most developers for urban condo projects couldn’t stop their projects mid-plan by leaving off the tops to their towers while they waited for the market to turn around.
And so the slowdown in sales comes at a time when still more new units are being built. As of the end of June, 577 new units were complete but unsold, according to MarketPointe Realty Advisors.
That’s about 577 units more than would have fit that category a couple of years ago, said Valone said. And another 1,208 units under construction are unsold, where some buildings once accepted reservation deposits on all the units before completing construction.
“There probably were some [unsold new units] a couple years ago,” he said, “but by the time buildings were complete, we would’ve seen them all sold.”
In those days, the buyer mix included many more long-term investors and short-term speculators along with the buyers looking to live in the units, where now the speculators have long gone, he said.
Where builders once dreamed of delivering thousands of units this year and next, several projects have stalled construction. Lenders are reluctant to issue massive construction loans. And so some projects are shifting gears, changing planned condo units to hotel rooms as in the case of a revised plan for the Ballpark Village project.
That project, included in the revitalization plan accompanying the Petco Park vision, was slated to be a 1,200 condo project. But now, with the opening of such new projects as ICON and The Mark recently adding hundreds of condo units to that neighborhood, the developers of Ballpark Village are charting a different course.
Developers JMI Realty and Lennar Urban Development have stated recently their intentions to convert the project to a 1,650-room hotel that would sit next to the ballpark and attract more business to the Convention Center.
“Maybe when Ballpark Village was originally conceived we were in the boom of the real estate market,” Valone said. “But now there’s anticipation that we’ve maybe got another year or more to go through before we see a significant turnaround.”
And another project, called Elle, has converted plans for 173 condo units to a hotel downtown.
“The hotel business downtown is great, as opposed to the condo business,” said local real estate analyst Peter Dennehy. “The money goes where the investment opportunities go. [Hotels] may or may not be more lucrative from a deal point of view, but they’re not overbuilt.”
Other developers have listed land and projects, some that have already gone through the permitting process, for sale on the commercial market. One such project in East Village is a fully entitled 22-story high-rise condominium project with retail and parking space that has already gone through the costly and time-consuming permitting process. The property is on the market for $12.75 million.
The city’s downtown redevelopment arm, Centre City Development Corp., said it’s tough to tell how many projects are stalled, waiting for financing or better market conditions, or selling completely.
“We don’t know because they’re not doing anything,” said Brad Richter, CCDC senior planner. “So many of them are on hold.”
But Dennehy said developers showed quick reflexes when the market started to lose steam. He said despite the numbers of units still listed as “in the pipeline” with CCDC, the number likely to be built is much smaller. And the number of units on the market now is still “not a significant amount” compared to what might have been, he said.
“The market slowed down and a lot of the projects that were planned didn’t get built,” he said. “Thousands of units have not started construction. But every project is different. Some will still go forward.”
Most builders have sold enough to pay off their construction loans, said local analyst Gary London, and many can afford to wait on the last few dozen units in their projects until they can get the prices they want.
“I don’t know that builders are going to make a lot of money, but I don’t know that they’ll lose enough money to start doing discounts,” he said.
The resale market adds 503 more units for sale. Together, the 1,000-some finished new and resale units for sale make a stark contrast to the housing boom, when limited supply flung buyers into frenzied bidding wars and earned flippers quick profits.
Then, buyers snatched up any unit in sight — and many that had yet to be built — and banked on the double-digit yearly price appreciation that had come to characterize the region’s housing market.
It’s clear the downtown buyers obtained some of the same risky financing that has sparked large increases in foreclosures across the region and the nation. In the first half of 2007, the 92101 downtown ZIP code had 175 properties in some stage of foreclosure. The neighborhood measures 12th among the 95 San Diego ZIP codes for foreclosure activity in the first two quarters this year, according to RealtyTrac.
The distress among condo owners downtown has some scrambling to get out. Many units are listed at prices at or below the prices those owners paid in 2004 or 2005, and the addition of agent commission costs leaves dozens of owners selling at significant losses. The number of sales in the resale market has remained quite constant from quarter to quarter since the end of 2004. But without the sparkle of yearly appreciation to count on, some owners see their profit prospects dulling.
But London said developers aren’t to blame for poor consumer choices.
“If anyone’s stretched themselves, they should’ve known that,” he said. “That’s not the developer’s fault.”
Valone said that 45 condo projects have sold out since 2000, representing 6,000 new units. And another 26 projects — 4,439 units — are under construction. Of those units, about 2,500 have open escrows: buyers who’ve put usually 10 percent down to reserve the unit while it’s built.
On the resale market, the units that move particularly slowly these days are the units that were constructed with fewer extras in less-desirable locations, said Lew Breeze, a Realtor in Little Italy. Three new-construction projects downtown were planned or even built as apartments, then converted for sale as condos during the boom because of the appetite for the units. The owners of some of those, including units in Little Italy’s Acqua Vista project, have found difficulty stacking their units up against others on the market.
“It’s a tough sell for non-quality units,” Breeze said. “If there’s about 500 condos on the market, there’s probably about half and half — half nice-quality units, half non-quality units.”
But slow sales aside, downtown advocates see any growth in the neighborhood as positive.
“Clearly, I think [the market’s] slowed; I think everybody knows that,” said Chris Wahl, spokesman for the Downtown Residential Marketing Alliance. “Now we have real buyers, people who are choosing to live downtown. We’re starting to see a lot more lights in the buildings.”
But if more lights turn on during weekends or baseball games, the downtown scene has yet to become a bedroom community with many more lights on during the week. Marketers are still working out kinks to reach the people who might change that. For a while, their campaign urged potential buyers to simplify their lives by moving to downtown, to de-clutter and consolidate furniture to move from a house in the suburbs to a smaller space in the urban core.
Focus group testing revealed a different aim among the empty nesters moving downtown. Now the marketers use “Be urban; be bold; be a part of it,” to lure people to the core.
“People are moving downtown to put a charge in their life, not to simplify,” Wahl said. “Just like New York, people wanted to be a part of what’s going on in downtown San Diego.”
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