Multi-family Homes in San Diego County Reflect Shifting Market
Real estate analysts, economists and industry officials agree the market is down, as evidenced by slowing transaction volume and declining average sales prices in all areas of the San Diego housing market: single-family homes, apartment properties and condo conversions.
The softening trends in San Diego County have been caused in large part by buyers’ hesitation and sellers reflecting general concern in the marketplace about future mortgage rates, job growth and wage growth, population migration and widely projected downturn in the national housing market.
According to Mack Langston and Cathryn Low of Lee & Associates, the sales of apartment properties, including those intended for condo conversion as well as for production of rental income, reflect a general softening in the real estate market, in terms of transactions and prices paid.
There were 139 sales of apartments with 10-plus units intended for rental income production, a 28 percent drop from the 194 such sales in 2005. In 2006, the average price per unit was $132,000, a 7 percent decrease from the 2005 average of $142,000.
During the year, the average price fell 25 percent from a high of $158,000 in the first quarter to a low of $119,000 in the fourth quarter 2006. This was the lowest quarterly average price per unit on properties intended for rental income production since the first quarter of 2004.
Due in large part to the drop in California mortgage demand, the decline in sales of 10-plus units intended for condo conversion was even more severe: 26 sales in 2006, a 75 percent decrease from the 102 sales in 2005 intended for condo conversion.
In the second half of 2006, there were only four sales of apartments with 10 or more units intended for condo conversion, compared with 47 sales in the second half of 2005. The average price paid per condo-conversion unit peaked in the first quarter 2006 at $210,000, and plummeted 37 percent during the rest of the year down to $133,000 in the fourth quarter.
The fall in the volume and prices for condo-conversion properties reflects a slow sales absorption that all conversion projects have been experiencing in the California housing market. There is so much inventory already that the premium for condo-mapped apartments is gone except in rare cases.
Condo converters are now seeking help to work out their home mortgage loan financing issues on their non-performing properties. The combination of a market flooded with converted units, slightly elevated interest rates and sluggish consumer confidence has stalled the conversion market.
However, there is a silver lining for investors now that prices are becoming more realistic. Cap rates on conventional multi-family product are returning to levels supported by old-fashioned real estate fundamentals. For properties without a condo map, the average cap on 2006 fourth-quarter sales was 5.67 percent, up from a low of 5.17 percent in 2004.
Investors are likely to require cap rates in the 5.5-6.5 percent range, depending on location, so that a target return can be generated from rising rents without fuel from condo-conversion mania. The desirability of the Southern California housing market always going to be reflected in lower cap rates.
The most recent rental survey published by MarketPointe shows strong rental rates and historically low vacancy of under 2 percent. More realistic cap rate expectations, on the part of both buyers and sellers, should result in a more active and sustainable market.
If buyers trade in real estate for the short-term, they will probably want to play in a different market for a couple of years. But if buyers invest with a longer view, they can’t own a more desirable asset than San Diego real estate, especially with a housing shortage that’s not going away.
SOURCE: San Diego Daily Transcript