‘A Sinking Condo Market At The End Of The Road’
The Voice of San Diego has this report on the condo market. “A couple of weeks ago, Bob Pinnegar was discussing with his colleagues what to call the phenomenon in San Diego real estate: the condo conversions that are now reverting back to rental units.”
“Pinnegar, executive director of the San Diego County Apartment Association, isn’t sure if they ever pinned down a final moniker. But he does know that everyone in the business is asking what’s going to happen to all the people who jumped on the condo conversion bandwagon in San Diego, only to find a sinking condo market at the end of the road.”
“Many developers in the niche market of condo conversions bought apartment buildings at high costs, but now find themselves left with little option but to put their units back into the rental market, hence conversion-conversions.”
“‘”It’s sort of a game of musical chairs, and those who were the last ones to find a seat are going to get hurt,’ Pinnegar said.”
“As more and more condo conversions and new condo projects have come on the market, developers have faced tighter competition to sell units. That’s led to falling prices in the condo market and a glut of condo conversions with fewer and fewer buyers to go around. More than one-third of the 23,221 homes currently listed for sale in the county are condos, according to a real estate brokerage firm.”
“‘The condo market’s weak,’ said Alan Gin, professor of economics at the University of San Diego. ‘On the supply side, there’s been an overdoing of the conversions, there’s probably too much out there and you see that by these people trying to pull supply off.’”
“(Consultant) Gary London estimates that there are 7,000 to 10,000 condo conversions in the pipeline for the city of San Diego alone. He thinks many of those properties will revert to the rental market. For companies who bought into the conversion craze late, that could spell trouble.”
“‘There was a glut of purchases of apartments over the past 36 months, in the past 18 months in particular, where the price that was paid for the building could only be justified by converting the units,’ London said.”
“Kent Williams, who manages the San Diego office of (a) real estate brokerage firm, said his company is being approached by many investors and companies looking to offload their planned condo-conversion properties.”
“‘They can’t take them to the market and sell them as individual condos, so they’re coming to us and probably other brokers and saying ‘I want to sell these as a bulk condo sale.’ We’re telling them there’s really no premium for that; it’s really an apartment building,’ he said.”
“Chuck Hoffman, president of Apartment Consultants, Inc., cited as an example a small apartment building in North Park that has sold four times in six years. The building sold in March 2004 for $2.1 million to an investor who planned on converting the property to condos. The investor spent tens of thousands of dollars getting the building permitted for condos but then decided to bail on the project as the condo market slumped.”
“He then sold the property as an apartment building in May 2006 for $1.7 million, netting a loss of at least $365,000.”
“Condo conversion-conversions are not a new phenomenon. Industry players said they’ve seen this happen before in response to other market shifts.”
Florida is in the same boat. Apartments at the end of their useful life cycle have suddenly became “luxury condominiums”. The only thing luxury is the premium paid for a crappy apartment.
I really wish they would stop calling these apartments for sale “condos”. A condo implies a garage, not some lot parking, or street parking, and even a carport is barely cutting it. For these prices they don’t even include a garage, who buys these shoeboxes.
My girl is in a Real Estate class now and the teacher told them, you know its an apartment if you hear this all night , he said condos don’t share common walls that lack sound deadening like concrete. Apartments that are turned into condos you can hear all your neighbors. The class burst out laughing.
I couldn’t put in the sounds, just think two people humping all night. Thats what you get for $400,000 in San Diego conversions. No thanks.
Only they won’t be humping all night. They’ll be staring at the ceiling, sleepless and terrified, wondering what they were thinking when they paid $400K for a glorified tenament — secretly blaming each other, and Suzanne.
Gee, to me condo just means an owned aparement. Nothing more, nothing less.
technically you’re right. Heck they can even call a floating cruise ship a condo if they find some sucker to pay 1/2 mill to live on one, at least it has free food*
*subject to $19,000 / mo meal plan package.
I can just see the plunge in rental rates as the condo converions convert back to apartments and the owners try come hell and high water to fill them in with renters. Can you say “rent rates plunge”? I knew you could.
Because it’s not just conversions, many new condos have been built. The total supply of multiunit housing has ballooned and the demand for it has not. This has been somewhat masked for those who refused to see it by the fact that during the “conversion” process alot of housing was TEMPORARILY removed from the market. Once all the supply is back, rents will fall dramaticly, and along with them, much of the financial return(the value of future imputed rents) of condo purchase.
I predict that there will be such a bloodbath in the condo market that within 5 years from now “SanDiego/Orlando/LasVegas condo” will be a punchline on sitcoms and late night TV.
There was a piece recently in the LATimes, indicating how there was steady increases in monthly rentals for Southern California (~7-10% per year, I think).
Of course, they didn’t do a deeper analysis as to how much of that incease was due to a decrease in the rental stock.
Check out Jim Stacks’ chart at Investech.com. ..It really has mirrored the
tech stock chart. My thought is we havn’t had neary the drop as he indicates…All things in time”
http://investech.com/
i believe he’s using the homebuilders stock index as a reference, not the cost of housing.
Curses :(, one of my better predictions has vanished from public view since thehousingbubble2.blogspot.com now redirects straight here.
Anyway, sometime in July or August 2005, Ben had a thread on indicators that the bubble was bursting, and I said then I thought condo projects failing would be one indicator that markets were topping out.
Looks like this is indeed starting to happen in several places; both with apartment conversions and new-builds.
condos, last up first down
(one of my better predictions has vanished from public view since thehousingbubble2.blogspot.com now redirects straight here.)
I’ve read so many things in the comments section before I heard them in the media. someone said sales would crash first along with spiking inventory. price decreases would be last.
the list goes on.
short sale
repartments
hidden inventory
…..Pride before the fall? ,or was it inredibly stupid investments, I forgot.
—-
Looks I am going to lose the office pool. I said Aug. 18 to hit 1 Million…ZipRealty has 903,112 active homes
Phoenix is over 52K! This is the hotest summer I can remember. It was 118 on Friday. My electric bill came and i did not even want to open it.
Yeah, my bill goes up in the summers, too. It’s so hard to find the extra $10 bucks a month to cover the occasional use of the air conditioning. But, what really kills us is the extra $20 dollars (relative to spring/fall) in winter. I guess the heater uses more electricity than the cooler. Darn those 64-degree February days!
-We Rent! in San Diego
Tish - there’s always hope.
I am not expecting many new listings between now and September, though. Most people are aware that folks are lolling about on vacation in August - D.C. is hopeless for sales in August.
June 13
ZipRealty has 838,211 active homes Nationwide
There are 55,758 homes for sale in Washington D.C. Area
July 16
ZipRealty has 893,225 active homes Nationwide
There are 58,399 homes for sale in Washington D.C. Area
July 24
ZipRealty has 902,923 active homes Nationwide
There are 59,317 homes for sale in Washington D.C. Area
The exact same thing happened in the wireless phone industry. Companies paid so much to buy spectrum they couldn’t afford to build the equipment necessary to provide the service, so a lot of them either handed the licenses back or went bankrupt.
There is likely going to be a lot of bankruptcies falling out of this, and then the property will get sold for a vaule that is more in line with a profitable business model. I wouldn’t be surprised if the people who sold the apartments to the “developers” will be the same ones buying it back on the cheap. At least they will have experience managing rental propertyies. I bet most developers make lousy landlords.
Yeah and they got a nice round of capital upgrades (and all the granite you can imagine) for free. Nice work if you can get it.
Another similarity is in the cellular boom it was doctors and lawyers and speculators that got in late and took a beating
Though a bit OT, this reminds me of what happened to the Pebble Beach golf course back in the 90’s. A Japanese company paid top dollar only to sell back to the original owners a few years later for half what they paid.
But doesn’t real estate always go up?
Pebble Beach
Heavenly Ski Resort
Steamboat Ski Resort
Rockefeller Center in NYC
All were bought by the Japanese for top dollar and later sold back to Americans for HUGE discounts.
Lots of examples of this around the world from the late 80’s/early 90’s crash, with the Hotel Arts in Barcelona and 1 Jermyn Street, London being two classic examples.
I suspect the Japanese learnt their lesson this time around, though.
Swede’s did much the same thing.
Regards,
Loafer
I agree. From the strong hands to the weak hands. From the weak hands to the strong hands. Where have I heard THAT before.
If condo’s ever slow down here in San Jose it’ll be the sure sign the fun is over. For now just about the only things selling are condos at the magic price point of $500K and under. Off 101 in San Jose past Tully they are building a beehive of non-descript cramped condos as fast as they can. The buildings are still at the pylwood phase but have Huge banners hanging off them proclaiming the $500K starting price. I find that a lot of what has been thrown up in the past year or two is cramped and unpleasant to live in with little or no privacy and god help you if you have childern who need a place to play. Another complex that went up overnight in the $1M range is literally right next to 101 south on the way to Morgan Hill, the sounds of traffic would make those places unbearable.
Mo…I was at a friend’s house in SJ for a pool party on Saturday(Whew! that water sure felt great!) and she was even surprised at the prices in her neighborhood. She’s off Camden on Paso Los Cerritos near the Almaden Golf/Country Club. House was built in ‘72, she probably purchased it in the $200s years ago (I’ve known her for 10 yrs and she’s been in that house at least 15 or 20+ yrs)…they are now selling for $1M+. She said that as fast as they go on the market, they are plucked and sold. And get this….her house has NO central air …. None, nada, zip, zilch…..plenty of ceiling fans, but I was in the pool MOST of the time.
Probably 30 or so people were there with only about 5 of us in the pool. So unless AC was installed, I suspect most of the houses in her ‘hood have no AC. With the temps in the 100s, being in the pool was very cooling indeed.
BayQT~
There is an article in this week’s San Francisco Business Times (July 21-27) regarding the trend towards converting condominium projects into rentals while construction is underway. It refers to several large projects in San Francisco and Oakland, but speaks generally of the entire Bay Area. Although there is a happy spin put on the story, per the generally “optimistic” tone of all of the paper’s articles, the best they could come up with was that rents are rising so it makes more sense to lease them (for the next ten years, or so, according to the article) than to sell them as condos because of “rising construction costs.”
We’ll see. Looks like a lot of upside down construction loans in the offing to me…
In the medium to long term the only think that will keep rents up is if a bunch of these projects get stuck in an unoccupiable point halfway through the conversion process, taking them off of the market.
If this flip home sells at current price it would put a smile on face of Richard Davis! of Trademark properties.
listed
27424 SUNNY RIDGE
Palos Verdes Peninsula, CA 90274
MLS ID#: P928887
$1,689,000
4 Bed, 2.75 Bath
27424 Sunnyridge Rd, Rolling Hills, CA 90274 1 week change:
-$23,223
Last updated: 07/13/2006
below is recent data.
Sale History & Tax Info Sale History
02/03/2006: $1,265,000
No other sale data is available
2005 Property Tax $2,035
Total assessed value: = $159,151
Assessed value bldgs: $98,307
Assessed value land: + $60,844
“‘There was a glut of purchases of apartments over the past 36 months, in the past 18 months in particular, where the price that was paid for the building could only be justified by converting the units,’ London said.”
Here’s some of the sale prices on some of the huge apartment complexes that sold in San Diego in 2004 when the market was still going wild.
Downtown
382-unit Acqua Vista Condominiums $106,000,000 $277,487 per unit
230-unit Palermo Apartments $58,200,000 $253,043 per unit
150-unit Laurel Bay Apartments $56,600,000 $377,333 per unit
149-unit Atria Condominiums $52,000,000 $348,993 per unit
Metro North
970-unit The Promenade Rio Vista $203,000,000 $209,278 per unit
338-unit Carmel Mountain $69,500,000 $205,621 per unit
225-unit Monarch @ Carmel Valley $83,000,000 $368,889 per unit
200-unit Carmel Point Condominium $63,000,000 $315,000 per unit
181-unit Andalucia Townhomes $71,500,000 $395,028 per unit
La Jolla
250-unit Regents La Jolla $92,000,000 $368,000 per unit
184-unit Villa La Jolla $43,000,000 $233,696 per unit
University City
685-unit Nobel Court $149,000,000 $217,518 per unit
514-unit La Cima $131,250,000 $255,350 per unit
368-unit Venetian $96,000,000 $260,820 per unit
312-unit Las Flores $65,700,000 $210,577 per unit
Pacific Beach
108-unit La Jolla Pacifica Apartments $25,056,000 $232,000 per unit
We’ll see if new carpet conquers all market troubles and the previous problems they had as rentals. Some which were converted are now taking renters again to lessen the amount of money they are bleeding. Lots of incentives and markdowns on conversions here in SD.
Wow, unbelievable costs per unit. Do you have any idea what these would rent for?
Haven’t heard this for awhile. Back when I got into apartments, 1997, it was common knowledge that you didn’t overfix-up a rental unit. If you know you can’t recoup the cost of improvements in the rent, you don’t put them in. I predict rents are going down, apartment quality going up.
Most of these places would or used to rent for about $1500-$1700/mo. The Andalucia property would be an exception to the average conversions here because it was built as a townhouse condo with attached garages. Most of these places are small, old and apartmentish despite the superficial redecorating.
Clarification- That price would be for 2 bedroom units. The one bedroom units would generally rent for about $250/mo less.
La Jolla
250-unit Regents La Jolla $92,000,000 $368,000 per unit
WOW, that one stands out, not only is it bad place to buy, its just as bad to rent, looks like they get the double whammy, and the price, LOL, never in a million years would anyone want to OWN one of those after reading these reviews:
http://tinyurl.com/o8yjy
Unfortunately, I doubt that most of the buyers did their homework into what life was like there before. Like Regents LJ, the ones that sold in the UTC area are just as bad. It’s all about the howmuchamonth and/or “How fast can I flip this?” I’ve also noticed that the two worst have cut back on the sign twirling budget as the market has continued to deteriorate.
Hey suntaxed, do you have a link for those sales figures?
Yep.
Here you go. The press release was from April 2005.
http://tinyurl.com/haj52
Some of the market increase data and percentages in it are also interesting.
Holy cow, this is from that link:
‘Prices have reached an historically uncharted level, with condo converters paying nearly double what might otherwise be the value of an apartment project not suitable for conversion,’ said George Carlson, vice president and apartment specialist with Burnham Real Estate.’
Yeah, which means they paid cap rates of probably 2% or so betting on the conversion….Now, its back to the rental market after pumping another $50-$75 a foot into them to prep for sale…What does the internal rate of return look like now ??? Something significantly less than 2% is a given….Someone, somebody, some pension or something is going to pay a terrible price for this fiasco…
“Pinnegar, executive director of the San Diego County Apartment Association, isn’t sure if they ever pinned down a final moniker.”
Is Pinnegar seeking suggestions for a final moniker? I suggest “con-partments.”
Or how about “conversion reversions”?
In his novels and short stories, Philip K. Dick referred to them as conapts.
Duh. “Repartments” of course!
I vote for “conpartments” or “conapts” if they were mapped, or “repartments” if they were never mapped.
I’ve been trying to popularize rentominiums.
Oooohh, me likes.
I’m curious. If an apartment building is converted to condos with costly upgrades and other amenities to attract buyers, what happens to rents when they are ‘repartmented’? The new or original owners would obviously want to charge more for rent now that they are nicer. However in a market where a glut of new rental inventory is coming online and that rents are tied to incomes, I would think that there would be a price point ceiling for rents irregardless of granite countertops etc. In other words, haven’t these condo-converters just made average apartments into really nice apartments that they can only charge so much for?
Bingo…they will have just have longer to break even on those granite countertops by recouping the costs at market rental rates.
Auk soooo, Therein lies the rub. On the other hand who gives a rip it’s investor money . The builders are taking the skim as long as possible ,and throw up their hands when the end comes. ” It wasn’t me, the market turned! “
There are these conversions by me that 6 months ago were drug infested prostitution centers, thus the police cracked down and took the bldg from the owners. Now the sign flipper guy is out on the corner every day touting bay views (of the fwy across the street) for a mere ”high 200’s… every time I pass by there are only 2 cars in the driveway, one I think is a realtors.
They can charge whatever the market will bear (usually determined by amenities and incomes).
I think the rental effect that many on this board are predicting will be minimal, if at all (rents falling). Over the past 5 years, very few apartments have been built, and people who normally would be renters were able to get free money with nothing down, so they have been buying, not just conversions, but SFHs and true condos.
Conversions either a) sold already to an end user, b) sold to a speculator who will be likely renting very inefficiently and pushing rents as high as local wages will allow, c) recently converted after kicking all renters out–although most conversions are done in phases, or d) were never converted–still full of renters.
Newly built condominiums have a development duration of 3-4 years, condo conversions - 6-9 months. Only a fraction of converted units will come back to the market. I think that the only category above that will have any potential impact on rents whatsoever is c). The rest will not IMHO.
I expect rents to be rising in most markets, even those with lots of condo conversions.
One last point–at the prices that converters were buying the apartments, and at the leverage they were obtaining to do so, there is no way in hell that they could rent them out and pay the mortgage. There will be lots of conversions going BK if they can’t sell them as condos. Again, slowing the flow of these units back on the market as the banks figure out what to do with the non-performing loan. It will take a while to unwind.
RW, I agree with you, the short-term effects of the bubble will put upward pressure on rents. A lot of inventory (apartments, condos, and houses) will go unused as it is either held by investors who can’t sell at prices that will make them whole, or is in default/foreclosure proceedings. Also, there will be a lot of people will be moving back into the rental market when they lose their houses.
Long-term the rents will decline again and stagnate as all this inventory comes back online.
I agree. The problems with conapt reversions is that the property is now laden with debt commeasurate with the inflated expectations for sale as condos. So the units cannot compete in the rental market without massive negative cash flow. The debt will have to be extinguished before the units can compete with apartments that were kept as such.
I have to agree in the short-term there is upward pressure. But first you say that many of these conversions have been sold — to who? People who used to rent? Then we have a one-to-one removal of supply/demand and a zero net effect. There are also quite a few SFHs that just directly flopped to rentals.
I do agree that the BK proceedings will take time, but I think within two years we will see rent drops here.
I don’t think it will take long at all. Banks have been through this before. They know the routine.
You have to remember that a landlord can’t raise rents until the lease expires. So any landlord looking to take advantage of any tempory shortage of rentals - which I don’t see around here - will have to wait until the leases signed in 05 early 06 expire. By that time banks will be putting properties in the hands of low ballers who can rent at a realistic cost basis.
Many of the conversions have been sold to people who used to rent there, to people who rented somewhere else, priced out of the traditional condo market, or (and this is a biggie) to speculators.
The condo conversion craze has been going on for 3-4 years, so well over half of the converted units have likely already been renovated and sold to someone.
I think that short term, rents will rise, and long term they will stay higher in high growth markets (population growth will absorb excess units in the next couple of years). The limiting factor will be wages.
In slow growth markets that have a permanent, high plateau of housing inventory, rents will see downward pressure. Wages will not be a limiting factor in these markets.
Sorry, didn’t address your question.
You didn’t factor in that there is population growth, and with construction costs as high as they are, rentals are very hard to pencil. So, yes, many of the units were taken off by renters, and thus the one-to-one removal and a zero effect for existing stock if you assume supply and demand are constant.
But, supply and demand are not constant. Supply has not been growing very fast because of high cost of construction, and demand has been growing (as it was in the past). This is especially the case in places like Phoenix and Las Vegas.
Clarification–when talking about no supply being built, I’m talking about apartments for purposes of being apartments, not SFHs and for-sale condos which I am well aware have been built like there is no tomorrow.
And to be clear, I do not view a $300,000 condo that is going to be put on the market to be rented by owner as all that competitive with a well-built garden-style apartment that is expecting to rent for $1,200 per month. The owner of the $300,000 condo is going to be pushing for higher rents, or go BK and the bank will take it back to sell for
I was wondering if anybody knew if those big buffer walls they string along the freeways to block noise for all the tracts really work?
Depends upon your perspective. The a$$holes who built and the idgits who bought too close to the freeway get relief but the sound goes somewher, in this case those who didn’t buy too close get more sound and pollution, lucky them. Just more vistims of the anti-automobile and pro high density crowd.
Exactly. The sound walls do not absorb sound, they only reflect it. Depending on weather conditions, this can result in the noise being projected over miles of distance. A nice inversion layer and a little fog or smog will do it.
I guess it depends on one’s definition. They do reduce the noise level but only so much as the maddening ambient drone of the freeway is unavoidable. I am always fascinated by some of the Mcmansions I see built right to the edge of major freeways. There a development in San Diego built just adjacent to the 5-805 merge. We’re talkin’ 12+ lanes of major freeway with the noise and pollution wafting straight into your living room, if you even dare open your window
I live right at the 5-805 merge, and the noise from the 12+ lanes of freeway is really quite an interesting phenomenon. If you’re abutting the freeway, it sounds like you’re on the bank of a major river. This is true, whether there is a soundwall or not.
However, the sound attenuates rapidly with distance, the decibels must be going down as either a power of 2 or 3 (physics is a bit rusty). And, of course, if you’re lucky enough to have a few interposing buildings, then the sound dies off completely.
Amusingly enough, there is one of those ‘million-dollar’ homes atop Del Mar Heights for sale, which faces the new 12+ freeway interchange referred to above. Above the real estate agent, it actually says “view”. Of course, if you subtract out the freeway interchange, it would indeed be a beautiful view of Carmel Valley. With the freeways, not so much.
They work very well as exhibition space for graffiti art.
“some of the Mcmansions I see built right to the edge of major freeways”
This was as bad as joggers jogging next to the freeway trying to show the world how fit they where when we had lead in the gasoline. Lead levels were the highest in that area. Now people in two story houses along the freeways get to breathe in the new pollution for a premium price.
There are about 10,000 more units that will become rental units in downtown San Diego at this rate. Why would I live downtown when I could like 3 blocks from the beach for 800/month? They better drop the prices….
Flopartments?
Condo conversions will make for nice clean tidy apartments….better then the crap i used to rent
I like GetStucco’s “conpartments” above, but how about something less likely to incite lawsuits for slander or libel: compartments? The word already exists, and defines these miserable spaces well.
How about “can’tominiums” or “condon’tminiums”?
A name for the “conversion-conversions”?
How about con-cons?
‘eternal resting place’
Once again: “Repartments”
I second that motion.
‘Repartments’.
All in for “repartments”. It has a certain “ring” to it.
BayQT~
It gets worse for San Diego property owners. A brand new property tax to pay for the Union’s pension obligations, that won’t even need voter approval, is about to be setup:
http://tinyurl.com/nuq24
It seems even the Unions wants a piece of the bubble taxes.
So lets see, San Diegans who bought in the last few years face, higher intrest rates, even higher property taxes than they imagine a year ago, sinking property values, no buyers, arm’s reseting, man all we need is an Earthquake and poof, all that paper equity just disappears.
I think it’s time to dump some tea into a harbor again.
I don’t think the unions should be counting on that new property taxes, especially if City Attorney Michael Aguirre establishes in court that there was fraud and collusion when the Pension Board approved those increases.
niecly done San Diego, your pension fraud cost you bond market funding, a stadium for the Chargers, and best of all more taxes for the Unions. Keep voting those incumbents in!
Let’s hear it for the Chula Vista Chargers! Wohoo!
it looks like the San Diego city government is really trying to stick it’s “TWO CENTS WORTH” to their residents. Long live these crooked turkeys. San Diego property owners - rebel and throw the bums out.
“‘There was a glut of purchases of apartments over the past 36 months, in the past 18 months in particular, where the price that was paid for the building could only be justified by converting the units,’ London said.”
You know, I never got past econ 101, but even I realize that this is the quintisential statement that there IS a bubble. If the price can’t be justified by rents minus carrying costs, than it is too high. All the acreage of granit countertops in the world won’t change that simple economic fact.
Chula Vista Chargers? What about National City Chargers. Or San Ysidro Chargers? Imperial Beach Chargers? El Centrol Chargers? Or Tiajuana Chargers?
Barkeep, keep the 2 cent rounds of painful asspoundings coming for our San Diego property owners who are forced to cough up for some Union pension due to city government mismanagement.