Downtown San Diego condos were the rage for speculators at the tail end of the real estate boom. The thoughts were that values, of an emerging downtown, would fall in line with cities like Vancouver, San Francisco, and Seattle (based on a price per square foot valuation); that still may happen. If that's true, we may see downtown San Diego condos appreciate some 25% over the next 5-10 years.
That could fetch you an annualized return of 7-10%, much of it tax advantaged. That just isn't enough for the risk you take when you buy a downtown San Diego condo as an investment.
Now, let's be conservative and say that those "mature" downtowns increase 3% per annum and downtown San Diego condos catch up to their NEW valuations. That would make a lot of sense, right? The annualized return would be closer to 15% pre-tax. If the downtown population is going to triple in the next 20 years, the demographics are certainly on an investors' side, correct?
Promoters will point to the supply and demand imbalance as a supporting fact; that just ain't gonna be the case. 60,000 additional residents will mean some 30,000 extra households. Not all of those households will flock to the downtown San Diego condos; some will choose to live in rented multifamily housing. However, lets assume they do all want to buy a downtown San Diego condo. The questions then become, will the developers continue to build to meet the demand and, more importantly, can they?
Of course they can and of course they will. Developers, sensing demand, have projects on the planning table. The only way that demand becomes imbalanced with supply is if housing permits are restricted or they run out of land. A financially strapped city won't restrict housing permits. Take a drive downtown, sometime. While it is discernibly different from ten years ago, there is plenty of land to develop. Don't think that Chula Vista, Imperial beach, and National City won't clamor for the developer's dollar as they try to transmogrify their residential base.
That's what makes this downtown different from the aforementioned "mature" cities; there are other "urban" waterfront choices, ready to be developed. Those cities just need to get their act together. And get it together they will. There's just too much money at stake. Don't forget the allure of the beach cities, either. If the price of a condo approaches the price of a beach bungalow in Pacific beach, lifestyle choices may drive the new "urban dweller" into the "beach town".
Does this make a condo in downtown San Diego a poor investment? Not really. It just doesn't make it a GREAT investment, considering the amount of risk involved...and THAT is what we want.
Brian-I see you're keeping your stockbroker hours. I agree that an investment in San Diego high rise condos while still may be a good investment, is not a grt investment. Here in the OC they've backed off on plans to build a number of high rises that were slated for 2007-2008. They lacked the sizzle that was anticipated. One complex in Newport Beach had over 50% speculators jump in immediately. The building is still about 25% unoccupied and the investors are not able to flip them for the healthy profits they anticipated.
Love the new group, Brian. Thanks for putting on your analyst's hat so early in the morning for us!
great commentary!
your common sense approach is what's missing in the minds of the developers and well the mass media as a whole
Brian:
It will be interesting to watch downtown San Diego in the years ahead. Retirees and Ruppies aren't concerned so much with investment as they are in lifestyle. More and more, I am seeing affluent retirees wanting to live near train stations, coffee shops, theaters and museums. They want interesting walks, a sense of community and fun places to dine.
No solid research on my part--just anecdotal experience.
I feel it will continue to be a "lifestyle" destination for most. Those that really want that urban life, walking to work, eating in all the trendy restaurants, etc, will continue to drive that market
Agreed Jason. That's why the developers are flocking to build product down there. The demand will be met by the builders because there's too much money at stake. Until scarcity sets in, Downtown SD will always trade at the current 25% discount (P/SQFT) to SF.