Cranes in the sky over downtown San Diego , and not the winged variety , have some observers wondering if all of this construction activity might not be too much of a good thing.
But Derek Danziger, communications director for the Centre City Development Corp., which oversees redevelopment for the city in downtown, doesn’t see it that way.
“A huge number of projects are moving forward,” he said. “The sky is not falling.”
But the market has changed, he said.
“There is no denying that there has been softening, but it’s not a downtown thing, it’s across the board in housing everywhere,” said Danziger.
Douglas Wilson, chairman and chief executive officer of the Douglas Wilson Cos. , a prime mover in downtown San Diego’s rebirth , also sees the slowdown as “healthy.”
“It was a little frothy,” he observed. “What is happening now is a tonic for the long-term health of downtown and other markets. I do not think it is gloom and doom.”
Those who might be hurting now , such as the beleaguered condo converters , were “the not-ready-for-prime-time players” who “piled on, thinking they could get rich quick,” said Wilson.
While condo conversions are taking a dive throughout the county, they haven’t been a major factor in downtown San Diego, said developer Sherm Harmer, co-founder of the San Diego-based Urban Housing Partners. Otherwise, he added, things seem to be perking along.
“I have heard no discussions of projects being in trouble,” he said. “We monitor every one of them. If prices were falling, and demand was dropping dramatically, or if interest rates were escalating, you might have some kind of a triggering event.”
Harmer said he doesn’t see any triggers on the horizon.
“What gets real estate in trouble is job loss, but the economists are saying that we will gain new jobs,” he said. “And, you need a loss of industry. We have nothing but expanding and diverse industries.”
Adding a note of caution is Alan Gin, associate professor of economics at the University of San Diego, who also developed and publishes USD’s much-quoted monthly Index of Leading Economic Indicators for San Diego County.
“The thing I’m worried about is whether there will be enough demand to move all of those units,” said Gin. “Downtown condos tend to be higher priced, given their proximity to employment.”
While regular folks interested in urban living might find some “pretty good values” downtown, Gin added, “Now is not the right time to be speculating in real estate, and downtown is one of the more vulnerable markets in San Diego.”
But Harmer remains bullish.
“We have had a very soft landing, and a healthy one,” he said. “It’s taken the speculators out of the market. My guess is, we are going to be out of most new inventories by the end of the year and start to see shortages again.”
William R. Shrader, senior vice president of Burnham Real Estate’s Urban Retail Group, also sees a more “traditional” market these days.
Infrastructure and services for projects being built “ahead of the curve,” in such non-prime areas as 16th and Market streets, he said, might lag behind the residential development for awhile.
“But in the Marina District, the Ballpark and Gaslamp districts,” he said, “it’s just fine.”
Banking On It
Lenders have become increasingly cautious about residential development, said Russ Valone, president of MarketPointe Realty Advisors in San Diego.
“Equity investors that provide money to build buildings have taken a wait-and-see attitude, and projects that are moving ahead are having a difficult time getting that financing in place,” he said.
Financing for new residential development has become a challenge, agreed Harmer.
“Some builders haven’t been able to get started,” he said. “But, maybe this is an opportunity to fine-tune the product.”
The problem?
“Lenders have become concerned that there are not margins in these buildings, that there is too much risk for them,” said Harmer. “So they have slowed lending, and they ask builders to put in more equity, or are loaning a lower percentage of construction costs.”
Building in suburbia is much easier, and less riskier, said Harmer, because the urban builders need considerably more time to get their projects on line, while the projects themselves are more complicated to build.
“The risk element is just huge,” said Harmer.
It’s become a brave new world among urban builders in San Diego, especially considering the construction frenzy going on in places like China, which is gobbling up huge amounts of concrete and steel, said Harmer.
Factor in the specialized labor that is needed for urban development, added Harmer, and building becomes even more challenging. The real question for builders, said Harmer, is, how do you cope with changing market conditions?
“Every builder adjusts in different ways,” he said.
These could include a hold-and-wait strategy, or adding more capital and plowing ahead, using alliances to add more financial power to a project, or just walking away.
For Tony Pauker, San Diego regional president of the Seal Beach-based homebuilder the Olson Co., it means taking a wait-and-see approach before leaping into the market.
“Downtown is wonderful,” he said. “But it’s a challenge in the market right now, because an awful lot of stuff is for sale, both resale and new.”
Another factor of the market is the expense of building downtown, said Pauker, whose developments tend to target first-time buyers, and include Legacy Walk in Southcrest and Paradise Walk in National City.
“Downtown has matured, so what you’re mostly seeing built downtown are the towers, and they are very, very expensive to build,” he said. “The prices for downtown will be pretty expensive, and will price a lot of people out of the market.”
