(San Diego) Hot local market may be cooling, some say
Hot local market may be cooling, some say By Mike Freeman UNION-TRIBUNE STAFF WRITER June 17, 2005
Sales of San Diego apartment complexes plunged in the first quarter, as rising prices kept more investors on the sidelines, according to a report from Burnham Real Estate Services.
The decline could signal a change in San Diego County's red-hot market for apartment buildings. As with single-family homes, apartment complexes have seen huge gains in both sales volume and prices in recent years.
The top-dollar buyers of local apartments have been condominium converters, who typically perform a few cosmetic upgrades and resell the units individually.
San Diego has ranked among the nation's most active markets for condo conversions, according to real estate experts. Since February 2004, applications to convert more than 13,000 apartment units have been filed with the city of San Diego alone.
Fitch Ratings raised concern recently that the practice of condo conversions is becoming overheated in many regions. The loan rating agency didn't mention San Diego. It singled out New York City, Las Vegas and Florida as areas at risk.
Still, the flood of conversions in San Diego County has raised concern among some housing advocates, who say the practice reduces the stock of affordable rental units. Some local governments, including the city of San Diego, have begun exploring tightening regulations on condo conversions.
In the first quarter, the number of complexes sold dropped 25 percent to 244 buildings, compared with the prior year, according to Burnham's survey. The number of units sold fell 16.4 percent to 3,984.
Just how much of the slowdown is attributable to a weaker appetite from condo converters remains unclear.
"We are all asking ourselves that," said Robert Vallera, a senior vice president with IPC Commercial Real Estate. "I just came from a meeting where another broker said the market for apartment sales has slowed down, and of course condo converters have been a key element driving that market."
The supply of converted apartments on the market has increased recently. While exact figures aren't available, industry experts estimate that 3,000 to 4,000 converted units are on the market now or will be in the near future.
"Condo conversions, while still a substantial bargain, are probably reaching prices that are at or near the peak of the market," said Gary London of the London Group, a San Diego real estate consulting firm. "And that has been reflected in slower absorption of the inventory that's out there."
As a result, more converters are finding it hard to justify the high prices that some apartment owners want for their complexes, particularly in suburban areas, London said.
In addition, many new apartment complexes in good locations – the kind that converters target – have already been switched to condominiums, real estate experts say.
"Our county has an unusually small number of high-quality apartment projects," said Alan Nevin of MarketPointe Realty Advisors, a real estate consulting firm. "I would say right now more than 50 percent of all those high-quality units have been converted. In another year or two, there won't be any left."
Nevin added that many of the big condo conversion companies in San Diego are branching out into other cities, such as Los Angeles and Sacramento, because it's harder to find local complexes that are good candidates for conversion.
That's a big change from two years ago, when a shortage of condominiums on the market meant any conversion would sell quickly.
"For a lot of the local converters, their plate is pretty full. They've got a lot of product on the market right now," said Kevin Mulhern, a multi-family specialist at CB Richard Ellis. "So what's happening is the market is getting more refined. They have to be better conversions. They have to have merit."
Mulhern added that there's no evidence that the overall demand for converted condos is slipping among home buyers. But where two years ago one conversion project might have the market all to itself and sell 60 units a month, today five complexes are competing in the same neighborhood, with each selling 15 units a month.
George Carlson, an apartment specialist with Burnham who put together the survey, said the slowdown may signal "a healthy breather for the market, which has seen record investment activity and pricing in recent years."
Real estate experts also note that condo conversions are one of the few options left for first-time home buyers, given the region's soaring housing prices.
"There is nothing on the horizon that would lead me to think that there is anything (negative) happening," said Nevin, the real estate consultant. "As interest rates are going down again, I would think that would spark another round of buying."
Mike Freeman: (760) 476-8209; mike.freeman@uniontrib.com
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