BMC Residential Real Estate Conference speakers

SAN DIEGO—Everyone agrees that there is a housing crisis in the San Diego market and that more residences are desperately needed, but the obstacles to providing them are seemingly insurmountable, said speakers at the Burnham-Moores Center for Real Estate at the University of San Diego School of Business's annual residential real estate conference Thursday. The conference featured a keynote address by Tim Sullivan, managing principal of Meyers Research, followed by a panel discussion moderated by Sullivan, which included Accretive Investments CEO Randy Goodson, Fairfield Residential VP Brendan Hayes and Brookfield Residential's senior director of land and housing Tony Pauker.

Sullivan's address, “The Business of Housing: Massive Changes, Major Challenges (and Some Bright Spots),” discussed several real estate disruptors, the new political regime and the impact these factors are likely to have on San Diego's residential real estate market. The main disruptors he mentioned were Uber, which affects parking issues; 3D printing, which he believes will progress rapidly once the younger generation takes over the industry; and the consumer experience, from clicks-to-bricks retailers and new restaurant concepts such as Fox Restaurant Concepts—which features local food flavors from food trucks to fancy sit-down restaurants—to Amazon Go, which eliminates the checkout line. All of these disruptors have to potential to dramatically change residential real estate.

Sullivan also explored the Trump presidency, one in which 30 million Twitter followers are connecting to the president-elect via a direct line. While the first Twitter president presents some uncertainty, consumer confidence has surged to a nine-year high, and homeownership rates—at 63.5%–are about where we should be, Sullivan said. Another bright spot is Trump's view regulation. “Trump pays attention to regulation and sees it as a disproportionate share of costs to housing.” If his presidency ushers in inflation, Dollar Stores may soon benefit, he added.

In addition, the GDP is at its highest level in two years—3.2% in the last quarter, Sullivan said. “Consumer confidence is the driver of this. Consumers are confident and spending money.” In fact, they are spending 10% more on an annualized basis than they were three years ago, he pointed out. “But, there will only be consumers if there are jobs.” Job growth is good, but we also need higher wages to help the housing market, and wage increases are coming, he said.

In the housing market itself, we are seeing a slowing in the luxury sector, but foreign buyers—Chinese buyers in particular—still see the US as a safe haven for investment in residential real estate. In fact, China outpaces Canada, India, Mexico and the UK (all strong foreign investors in US real estate) in real estate sales combined.

So, what's the problem? “We could sell three times the homes we do, but we can't build them.” Finding land, getting approvals, acquiring financing and dealing with mounting regulations are preventing much-needed housing from being built, which puts us in a perpetual low-supply/high-demand scenario that raises prices and prevents entry-level homebuyers from entering the market. So, while economic fundamentals are good, Sullivan recommended watching for changes in fiscal and monetary policy; paying attention to boomerang buyers, which are back and will be a boon going forward; watching affordability, especially for Millennials and first-time buyers; recognizing that the single-family-rental market is here to stay; and not overreacting, but being more prudent in housing development.

Sullivan then revealed some housing statistics. Between 1986 and today, more than nine million people have been added to Southern California, but there were only 50,000 building permits issued. “We are not building enough.”

In addition to that, we have plenty of competition from other markets, with Texas being one of our top competitors for job growth since it's easier to do business there, it has lower taxes, less regulation and better schools. San Diego does have the advantage in terms of healthcare, for which it is “out there in front,” said Sullivan, but there is a 60% disparity between new and resale homes, which is 20% higher than the national average. At the same time, public builders “rule” in San Diego; because total revenue from homes sold is higher here (e.g., 20% of new homes are higher than $1 million), they don't have to build as much and have the opportunity to make a huge profit in a small community.

The most active market for builders is upper North County, which is also more affordable than other parts of the county. Prices throughout the county are high, but people are buying what's for sale at higher prices because there is so little inventory and a pent-up demand.

Sullivan then brought in the panel, beginning the discussion by asking Goodson what was behind the thinking of the Lilac Hills development, the subject of a recently failed ballot measure his firm was behind. Goodson admitted that his side did a poor job marketing Measure B, although it circulated two EIRs and the planning commission approved the deal as compliant with the general plan. “But two months after the commission approval, we dealt with the Supreme Court ruling on greenhouse gases—this is all brand new,” said Goodson. He explained that with certain projects, developers now need to prove that their project doesn't prevent California from reaching its greenhouse-gas emissions goals. While the developer did show that the proposed Lilac Hills project would reduce emissions, the initiative didn't pass, which is the case with so many housing projects in the San Diego market. “Every large project ends up being a target. There's so much regulation.” Sullivan asked Goodson about the future of this project, and Goodson said one day it will be built, but there are many developers who won't take a risk on a project like this one because of all the obstacles.

Sullivan asked the panelists how we can bring more-affordable housing to the San Diego market. “It's incredibly difficult,” said Pauker. “Time and regulatory issues flow toward higher prices just because of the challenges.” However, Sullivan pointed out, an example of a submarket that has rewritten its general plan to allow residential projects to streamline is National City.

Hayes said it rarely makes sense to build on the bottom level or entry level of housing because it doesn't pencil in this market. “The older supply becomes entry level; it's very difficult to target entry level” with new development.” Some development opportunities do exist here with attached homes and smaller projects, the panelists said, but Goodson pointed out that land owners are not pricing land fairly and don't realize how important it is to build and how difficult it is to attract capital.

With regard to interest rates, Goodson said they're always an issue, especially in San Diego, which has a strong luxury market. However, he doesn't think what he believes will be modestly rising rates will have a huge impact on the residential market here. He also spoke of Baby Chasers—grandparents who move to be closer to their grandchildren—as a potential target market. Pauker said there is a long- and a short-term scenario with interest rates whereby we will see a better Q1 and Q2 2017 than we've seen, but after that the urgency will be gone.

In discussing NIMBYism, which is quite strong in this market, Pauker said, “We put together frameworks, but we don't follow them.” He added that residents object to development, but more often than not, when the development is done, they're happy with it.” Hayes added, “The end result is often positive for the community.”

Sullivan said, “Humans are often fearful of change, but if change is embraced it can lead to improvement.” Ultimately, he concluded, assembling small deals will be important here, as will rebuilding and renovating. “When things are good, take risks; when things are bad, pull back.”

Instant Insights /

Facing the Housing Conundrum in San Diego County

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