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Multifamily is the future of SD homebuilding, economist says

Up to 85 percent of San Diego County's new residential units over the next 20 to 30 years will be multifamily housing, said Alan Nevin, Xpera Group director of economic and market research.

Nevin was the keynote speaker Tuesday of the San Diego County Apartment Association's 40th annual Educational Conference and Expo at the San Diego Convention Center.

Only a few single-family lots are available today, which was not the case in past economic recoveries, he said.

"The lot supply isn't going to improve until 2015, with Otay Ranch Villages 8 and 9," Nevin said. "By then, we will have gone a decade without hardly any new lots."

While the two villages could reach as many as 6,000 units at buildout, they won't come online all at once. Another problem, Nevin said, is the cost of processing the lots, and developer impact fees.

"In Carlsbad the fees are up to $80,000," Nevin said, adding that even the fees in El Cajon have reached an average of $30,000.

The combination of high fees and a shortage of lots in desirable areas have led Pardee Construction to build $2 million tract homes in Pacific Highlands Ranch, west of Rancho Penasquitos. As high as this price is, Nevin said that 70 people are on a waiting list to buy the homes.

"That isn't doing much for affordability," Nevin said.

High impact fees are also affecting condominium development. While there was a condominium-conversion craze before the Great Recession, it will return in a different form next time.

Nevin said that because many of the large condominium converters ended up seeing their properties returned to their lenders when the market collapsed, they aren't likely to gamble again.

"So many converters got burned," Nevin said. "They're not coming back."

Nevin said although there will be condominium conversions, they will be for fewer than 20 units at a time, rather than the more than 200 units in the past.

While there are problems associated with the conversions, Nevin, who converted eight properties himself, said they can be an excellent way of rehabilitating an older property.

Condominiums can be a transition point between an apartment and a single-family home, but Nevin warned that new condominium construction could bring back bad memories.

"Between 2000 and 2007, of 57 condominium complexes that we tracked in the county, 41 of them were part of a construction-defect case," Nevin said.

The future of condominium units may be problematic, but Nevin remains very bullish on the apartment market.

"We're going to have five years of ‘up’ in the apartment business," Nevin said. "There is so much money chasing properties now.

"As long as you have (apartment) vacancy rates north of 95 percent, it shows that most can afford rational rents. … This is one of the best places by far to own and operate an apartment complex."

Still, Nevin is concerned about escalating rents that he said are being exacerbated by high development impact fees.

"You can't produce a two-bedroom unit and charge much less than $2,000 in rent," Nevin said.

Impact fees and the lure of San Diego aren't the only reasons Nevin said rents are expensive. He said developers are also forced to develop parking, regardless of the need.

"We have to beg the city to allow us to build units with no parking, as long as we are on a transit corridor," Nevin said. "The city of San Diego may also require 1½ spaces per unit, even if that unit is only 300 square feet."

Nevin added that due to the high cost of development and continuing demand, he foresees building 300-square-foot units; the San Diego Yacht Club Apartments, for example, have 60 units that are only 290 square feet.

"These were part of an old motel," Nevin said adding that failed motel properties will probably be a very good source of apartment housing.

"There's nothing unusual here. Small apartments are common in Europe, where 40 to 50 percent want to live alone, and in New York, where 250 to 300 square feet is not uncommon," Nevin said.

Whether the units are small or large, Nevin said San Diego is a very strong play for the apartment investor if for no other reason that the county has consistently added jobs since the end of the recession.

"We've been adding more than 20,000 jobs per year (in San Diego County) since the recession," Nevin said, "and there's a pretty good chance we'll crack 30,000 this year."

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