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Apartment sales activity continues to slow through three quarters

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San Diego County apartment sales have continued to slow as the price disparity between buyer and seller expectations widens.

A Burnham Real Estate report notes the current sluggish sales period follows two years of record pricing and sales that had been driven by condo conversion activity that now seems to have all but stopped.

Burnham reports there have been 497 apartment transactions involving 7,847 units for the first three quarters of 2006, down 34.8 percent and 26.1 percent, respectively, from the 762 sales totaling 10,619 units during the same 2005 period. The report shows that 157 sales involving 2,487 units occurred in the third quarter, down 61 percent and 19.2 percent, respectively, from the 253 transactions totaling 3,077 units during third quarter of 2005.

"Pricing for San Diego apartment properties became distorted as condominium converters paid unprecedented amounts in anticipation of profits from the sale of converted units," said George Carlson, a Burnham vice president and apartment specialist. "The drop in sales for seven consecutive quarters shows a correction as investors continue to price the units as conventional apartments.

"The one dynamic that could continue to suppress cap rates is the strong demand for the units as San Diego's population and work force continue to increase without adequate housing."

Carlson noted that buyers need to be patient as the apartment market runs its course.

"Historically, market corrections are followed by significant decreases in selling prices, but not immediately, he said. "It's too soon for quarterly averages to reflect a major drop in pricing, but we can expect to see this in the near future. Buyers are already picking up 6 percent cap properties and passing on 5 percent caps, which has been standard over the past few years."

The Burnham report shows that there were five major transactions in the third quarter involving 100 units or more:

  • Villa Dorado, a 668-unit development in Mission Valley that sold in early August for $182.5 million or $273,203 per unit to The Irvine Co., which owns One America Plaza and Symphony Towers, among other properties.

  • College Manor, a 179-unit, 600-bed San Diego State University student housing facility in the College Area that sold for $37.55 million or $209,826 per unit.

  • Oakwood Apartments, a 170-unit project in Mission Valley that sold for $32.8 million or $192,941 per unit. The property is being converted into timeshares.

    Other projects included: Colonnade at Fletcher Hills, a 138-unit development in El Cajon that sold for $19.5 million or $141,304 per unit, and Mesa Garden Apartments, a 124-unit project in Vista that sold for $16 million or $129,032 per unit.

    Leading San Diego County in third quarter transactions was the Normal Heights/Kensington/University Heights area in central San Diego, with 20 sales of 188 units. Next was the Golden Hill/Southeast San Diego, another central area of the city, with 19 sales of 104 units, followed by the Inland North area of north San Diego County with 16 sales of 250 units and North Park, a third central city area, with 14 sales of 72 units.

    Inland North is the leading active area for the first three quarters of 2006, with 55 sales of 653 units. Golden Hill/Southeast San Diego follows with 52 sales of 409 units, then Normal Heights/Kensington/University Heights with 50 sales of 428 units and North Park with 45 sales of 240 units.

    Another reason apartment sales may have declined is owners want to hold onto what have been lucrative assets.

    According to MarketPointe Realty Advisors, the September apartment vacancy was a mere 1.84 percent -- a figure that places an upward pressure on rents. The 1.84 percent vacancy was 40 percent lower than six months earlier when it hovered at around 3 percent. The average monthly rent was $1,241 per month, or about $30 more than the March figure.

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