Remember the days when there were one thousand condos to choose from in downtown San Diego, there were so many, heads would spin just trying to figure out which buildings to look at and should you buy resale condo, brand new condo or something under construction. Well the real estate cycle continues through its somewhat usual pattern of over supply to the now limited supply. As a percentage of the total condos in downtown San Diego, only 2.3% of them are for sale. By most standards that is a real shortage. The number of condos for sale in January 2011 was about 450, now as of late November 2011 were down to 230. I don’t see this inventory tightening trend stopping anytime soon. Back about 10 years ago when there were about 50 units (or 1.5% of the total) for sale in downtown, you had to make an offer the day you saw it came on the market and for over asking price or another buyer was going to snatch the unit up. Of course we are still in the downward building cycle with no new condos expected to come on line before 2015 and no condos are currently under construction. What does this mean for the real estate buyer or seller?
Well if you’re a buyer consider that the choices you have are as good as your going to have over the next 5-8 years. By that I mean there are only two possible condos that would compete to be on the top 10 list that wont be built for at least another five years. All but two prime lots are left to build condos on. The two condos I am speaking about are to be Bosa Development condo complexes now where the Office Depot building is the other the big parking lot near the Harbor Club and convention center. The next condo they are going to build behind Bayside will always play second fiddle to Bayside as it will be one block back of the “residential front row”. No matter the quality, which I believe will not surpass Bayside, its location is not as good as Bayside’s in terms of the views. Remember, Bayside was designed around 2005 when the market was going up and up with no limit in sight and this building was to cater to the buyers that could pay record prices. Of course by the time it was completed the market prices were down and Bayside would never have been built to its high standards if they had known the actual prices units would be sold for. So with market prices down, I would expect the finishes of Bosa’s next building (yet to be named) to be of lesser cost and quality than those installed in Bayside.
So lets recap, available inventory is at is lowest level since 2002, no new inventory is coming on line till 2015 at the earliest, most future inventory will be in locations not as desirable as the buildings currently built. Only in 2018 and perhaps again in 2021 will you have Bosa’s final two high rise condo to choose from which will probably surpass the quality of Bayside.
If you think of the economics 101 classic supply and demand equation you have to be asking are prices going to rise? Demand is not really slowing down, sure the speculators looking for a quick flip have exited the market years ago, but the second home buyer from the hotter and colder climates are still active as well as full time retirement residents. One exception is the flipper buying trashed foreclosures and fixing them up and flipping them, that is going on now and they seem to be making about a 20% increase in the sales price for their efforts.
The local job market is not healthy but holding steady and the new federal courthouse downtown and the far off proposed Idea District in the East Village could add a lot of jobs in walking distance to these condos. Interest rates are expected to remain low for a few years out and the upcoming election could hopefully have some positive impacts on the macro economy. I think it’s better to be a property owner now and a seller over the next few years rather than a buyer trying to find a bargain in a market with limited selection and lots of competing buyers.
What about the “shadow inventory” being held by the banks? Also wont people start selling if the prices rise? The shadow inventory I think is a myth for downtown, I don’t see banks holding on to properties here, the market is not flooded with for sale inventory as other parts of the country where they are releasing foreclosures for sale in trickle amounts as absorption is slow. Most owners that have held on to their condos that took a big hit are probably still down 25% or more in value, if prices rise 10% they are not going to rush out and sell, even at a 20% increase I don’t see them selling, where they going to go? They could trade up but the new place will also be 20% more expensive. If it’s an investor glad to see the value of their investment condo rising, what are they going to put their money in if it they sell. The stock market is not super attractive these days plus they will lose the leverage. It’s the leverage they want, if prices are rising, which is what they were hoping for to begin with, they are going to want to buy more not sell.