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Broker report says apartment investments started turnaround by end of '08

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The economy has been nothing to write home about, but a new Cushman & Wakefield report insists San Diego County's apartment market had already begun a turnaround by the end of last year.

Cushman & Wakefield said after three consecutive years of dramatic apartment sales declines, conditions began to stabilize during the last quarter of 2008.

According to the study, the 114 apartment sales transactions in the fourth quarter of 2008 represented a 6.5 percent increase over the prior year.

Additionally, 2008's apartment transaction volume of 456 was down just 5.4 percent from 2007 -- a significant improvement over the three preceding years when sales fell by an average of 29 percent annually.

"Since the peak year of 2004 when 1,339 sales transactions were recorded, the San Diego County apartment market has seen annual declines in activity of 27.2 percent (in 2005), 28.6 percent (in 2006) and 30.7 percent in 2007," said George Carlson, a Cushman & Wakefield apartment specialist.

The declines in apartment sales were less in 2008 than those in the prior three years.

The Cushman & Wakefield report noted the 456 sales transactions in 2008 were down from 482 sales in 2007. The 2008 level was also a 66 percent drop from 2004.

"Historically, 2008 sales volume was the lowest level of activity since the recession year of 1993 when there were just 449 sales countywide," Carlson said. "However, following 1993, the number of annual apartment sales rose steadily over the next 10 years. If in fact the market has bottomed, we can expect to see a similar pattern evolve with gradually improving activity in 2009 and beyond."

Carlson said while apartment sales did seem to improve in the fourth quarter, the apartment investment market still isn't anything approaching normal.

The 456 sales transactions in 2008 involved 7,584 apartment units.

That was the lowest number of units in the 28-year history of the report.

The previous all-time low occurred in 1992 when 8,636 units were sold.

The 436 property transactions that year still represent the lowest level of sales in the lifetime of the report.

"The slowdown in number of units sold continues to reflect lower institutional demand for larger properties with 100 or more units," Carlson said.

"In 2008, there were four such transactions compared to 10 such transactions in 2004, most of which involved projects originally slated for conversion to condominiums," he said.

The good news for investors is that with low interest rates and depressed pricing, there may not be a better time to purchase well-located apartments.

"Prices of San Diego apartment properties had been pushed to unsustainable levels by strong investor and converter demand," Carlson said.

"Following years of capitalization rates in the 4 percent to 5 percent range, we are finally seeing capitalization rates in excess of 7 percent," he said.

"This puts the market back in the realm of positive leverage, with capitalization rates exceeding current interest rates. This provides owners with much improved cash flows and returns on investment," Carlson said.

In 2008, The Inland North region of San Diego County led the area in sales activity with 64 apartment transactions involving 1,656 units.

Golden Hill-Southeast San Diego was second for number of transactions, with 52 sales involving 707 units.

El Cajon was second for the number of units transferred, with 39 transactions totaling 1,016 units.

Other areas worth noting include Coastal North, which reported 30 transactions totaling 836 units; La Mesa with 13 transactions totaling 727 units; and North Park, which reported 47 sales totaling 444 units.

The four major fourth quarter sales included:

  • The 20-year-old 460-unit Bella Terra complex in Vista sold for $69.5 million, or $151,087 per unit, with a 4.9 percent cap rate.

  • The 28-year-old 406-unit Baltimore Estates in La Mesa sold for $53.35 million or $131,404 per unit, with a pro forma cap rate of 5.8 percent.

  • The 32-year-old 200-unit Coral Gardens Apartments in El Cajon sold for $19.7 million, or $98,750 per unit, with a reported cap rate of 6.9 percent.

  • The other sale comprised 111 of the 168-units of six-year-old The Crossings At Otay Ranch for $18 million or $162,162 per unit.

    According to apartment investor and former San Diego City Councilman Fred Schnaubelt, apartment prices peaked at $220,000 per unit in the fourth quarter of 2005, the height of the condo conversion craze.

    Year-over-year per unit apartment prices have now plummeted from $220,000 to $106,000 in February (CoStar Comps database), he noted.

    "We expect another 20 percent drop in the median price by middle of 2010 meaning half the units in 2010 will sell for less and half for more than $85,000 during this worldwide grand de-leveraging," Schnaubelt wrote.

    Schnaubelt said while money will flow to apartment projects by investors seeking bargains, he expects much of those funds to return to Wall Street once the stock market bottoms out.

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