Worst Shortage Ever: Downtown Edition

Submitted by Rich Toscano on February 3, 2006 - 12:24pm

Will Carless at the Voice of San Diego released a column yesterday, hot on the heels of my own, about the building climate in downtown. Central to the story is a builder who has gotten land, designs, permitting, and everything else ready to start building—but is instead just trying to sell the project and bail out. Of course, this is just one project and one builder, but it may be indicative of things to come. One real estate agent is quoted as saying that the boom attracted a lot of inexperienced people to the downtown building game: "In the heyday, a monkey could be a developer in downtown."

As I discussed in the latest monthly housing report, at the most recent rate of sales downtown San Diego has over two years worth of inventory listed on the MLS—a number that will likely grow as all these new building projects work their way through the pipeline. This is nothing short of an extreme oversupply, and is going to get worse before it gets better. Yet there are still people trying to advance the absurd idea that there is a housing shortage: the article discusses one local analyst who claims that "...soon enough, San Diego will face a 'shortage' of condos again." Just stunning.

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Submitted by Bugs on February 3, 2006 - 4:15pm.

Our downtown condos could end up being our affordable housing.

What's different about a condo project vs. a residential subdivision is that once they break ground, a condo developer must complete the project and sell it off before they're out of it. They're committed to the entire project, and because of the manner in which the construction loans are structured, they have to pay the loans off as they sell the units - there are no profits until after the loans are retired. It is the proceeds from the last few units that comprise their profits.

A subdivision developer can do their project in phases, and doesn't have to put in site improvements like streets and grading and such until they're ready to build - so they can hold a portion of their project site as raw land or grade the lots and sell those off to other developers or individually to owner-builders. The holding costs are still expensive, but nowhere near as bad as the holding costs for completed units.

I've heard that a couple of the condo developers intend to rent their units out while they wait for better times. Good luck on that. If a unit that would have sold for a mortgage payment of $3,000 month will only rent for about 1/2 that - before expenses - all renting the units out will do is to reduce the negative cash flow. It would only be feasible if the developer thought prices would recover and increase in 2 years or less.

The point I'm meandering to here is that once started, most of those condo units will not only come to market but will be under tremendous pressure to sell regardless of the price. Especially if the market is in decline when they come online. Holding (at a loss) won't be an option the lenders will be able to tolerate. If that happens, I think the resulting prices will help out our affordable housing situation.

Submitted by San Diego on February 3, 2006 - 4:51pm.

The downtown condos were always expected to be affordable, hence the apartment quality finishes. Look at the original selling prices. It was the flippers that drove up the prices.

What will happen is that the marginal sites (East Village) will not get built. No lender will put millions of dollars into a tower and then sit on it. Basically, anything east of 9th Avenue is probably going to sit for awhile.

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