'Correction' Slows Apartment Sales

SAN DIEGO-Sales of apartment buildings declined for the third straight quarter in San Diego County, representing what Burnham Real Estate calls "a correction" for asking prices that are too high in comparison with the income generated by the properties. The new Burnham report cites "a correction for sales prices that exceed a reasonable relationship to property income."The Burnham report listed 253 sales involving 3,077 units in San Diego County in the third quarter. That represents a decline of 32% in the number of sales when compared with the 373 sales in the third quarter of last year, and it represents a 57.6% decline in the number of units sold when compared with the 7,261 units sold during the third quarter last year."Three consecutive quarters of declining transaction activity clearly points to a 'cooling off' period," says George Carlson, VP and apartment specialist with Burnham Real Estate. He notes that the volume of apartment sales has hit its lowest levels in 10 years following a three-quarter decline in activity. The Burnham report notes that 2005 is the first year since 1996 when quarterly sales have numbered less than 4,000 units. Year-to-date, the county's 762 apartment transactions involving 10,619 units represent the lowest level of activity since 1996. In that year, 528 transactions transferring 10,271 units closed during the first nine months of the year.One of the biggest factors keeping prices high despite the imbalance between asking prices and rental income has been the wave of condo conversions, Carlson explains. Along with the condo conversion trend, the imbalance has been mitigated to an extent in the recent past by low interest rates and strong demand for rental housing that supported still rising rents, Carlson adds.Condo converters have been paying a substantial premium for properties that are candidates or are already mapped for conversion, which "has put strong upward pressure on prices in general," Carlson explains. The Burnham apartment report shows that sales prices have reached record highs, more than four times higher than those of a decade ago when the San Diego region was climbing out of recession. Average per unit sales prices of $166,000 in 2004 compare to under $40,000 per unit in 1995.Three of the four third quarter apartment sales of 100 units or more, were purchased for condo conversion: The $213,709 per unit sale of the 248-unit Bernardo Hills complex in Rancho Bernardo, the $205,872 per unit sale of the 114-unit Sunset Villa Apartments in Oceanside, the $186,958 per unit sale of the 120-unit Highlands complex in San Marcos and the $134,375 per unit sale of the 160-unit Park Grossmont apartments in La Mesa.The only one of the four that will be held as apartments and not converted to condos is the Highlands property, notes Carlson, who points out that it also commanded the lowest price per unit of the four. "It's easy to see the disparity in pricing between projects slated and mapped for conversion and those that are not," Carlson says.