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Unrealistic prices

Apartment sales in San Diego County decline for third consecutive quarter

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Sales of San Diego County apartment complexes hit their lowest level in nearly a decade, and what some consider unrealistic pricing may be taking its toll.

According to a Burnham Real Estate*Oncor International report, this was the third-straight quarter that sales have declined in the county.

For the first nine months of 2005, there have been 762 apartment transactions involving 10,619 units. This is the lowest level of activity since the first three quarters of 1996 when there were 528 transactions totaling 10,271 units.

The Burnham report shows that 253 sales involving 3,077 units occurred in the third quarter -- a 32 percent decline from the 373 apartments sold and a 57.6 percent decline from the 7,261 units transferred the same time last year.

"Three consecutive quarters of declining transaction activity clearly points to a 'cooling off' period in which the market is undergoing a correction for sales prices that exceed a reasonable relationship to property income," said George Carlson, Burnham vice president and apartment specialist.

"Where income properties are concerned, this imbalance was mitigated to an extent in the recent past by low interest rates and strong demand for rental housing that supported still rising rents," Carlson continued. "The imbalance of pricing not justified by income has been driven in large part by the wave of condo conversions. There is a substantial premium for properties that are candidates or are already mapped for conversion, and this has put strong upward pressure on prices in general."

Carlson said as recently as Oct. 7 that there were five new listings and eight price reductions, whereas on Oct. 22 there were 22 new apartment listings and 11 price reductions.

"Maybe sellers are recognizing that this is the last chance to get top dollar for their property," he said.

The Burnham apartment report showed that up until recently, apartment prices were at all-time record highs, and more than four times higher than those of a decade ago when the San Diego region was climbing out of recession. Average per unit sales prices of $166,000 in 2004 compared to less than $40,000 per unit in 1995.

Carlson said while year-to-date per unit averages for 2005 are not yet available, he expects they will be about the same, or even slightly less than last year.

The Burnham report showed that three of the top four third-quarter apartment sales of 100 units or more were purchased for condo conversion.

  • Bernardo Hills, a 248-unit apartment at 15343 Maturin Drive in Rancho Bernardo, sold for $53 million, or $213,709 per unit. That project, now known as Villa Taviana, was sold in August to a partnership controlled by Aslan Homes of Irvine.
  • Sunset Village, a 114-unit apartment at 3634 College Blvd. in Oceanside, sold in August for $23,469,499, or $205,872 per unit, to a unit of The Bethany Group of Irvine.
  • The Highlands, a 120-unit apartment at 830 South Rancho Santa Fe Road in San Marcos, sold for $22,435,000, or $186,958 per unit. The conversion was purchased by an entity of Pacifica Real Estate Investments of Rancho Santa Fe.
  • The fourth major apartment transaction was the sale in August of Park Grossmont, a 160-unit apartment at 9076 Campina Drive in La Mesa, for $21.5 million, or $134,375 per unit, which will be kept a rental.

    The conversion trend has continued since the third quarter ended as evidenced by the sale in October of the 384-unit Villages of La Mesa at 5606-5777 Amaya Drive in La Mesa for $84.5 million, or $220,052 per unit. The buyer was LM Funding Corp. with ING Realty Partners as its equity partner.

    More converted units are on the way. Later this month Montecito Property Co. will be introducing Terra Vista at Otay Ranch, a 168-unit complex in Chula Vista. The one- to three-bedroom units range from 709 to 1,356 square feet and will be priced from the $270,000s to the $480,000s.

    The Inland North area of San Diego County led the way in third-quarter activity with 32 sales totaling 328 units.

    Following were North Park with 27 sales totaling 166 units, Golden Hill/Southeast San Diego with 26 sales totaling 161 units, Normal Heights/Kensington/University Heights with 22 sales totaling 170 units, and El Cajon with 19 sales totaling 410 units.

    El Cajon, incidentally, is one of those communities that developed a surplus of apartments in the 1980s. Many of these are now in the process of being converted, which could mean a glut of condos in El Cajon.

    "It looks like the bloom is off the rose in El Cajon as far as condos are concerned," Carlson said.

    The numbers for the first three quarters of 2005 show a similar pattern to the third quarter's as Inland North leads the market with 83 sales involving 1,336 units. Following are North Park with 75 sales involving 521 units and Golden Hill/Southeast San Diego coming in close behind, reporting 74 sales totaling 560 units.


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