San Diego’s heralded Smart Corner is smarting — as in stinging. It’s a condominium/office building project, another of the City’s touted public/private sector ventures. What titillates city planners is that the trolley runs between a low-rise office building and a high-rise condominium tower. At the groundbreaking for the $120 million project in 2004, then-mayor Dick Murphy exulted, “This is such a great example of smart-growth principles, which are part of our City of Villages plan.… You can walk and take transit to the ballpark, City College, the Gaslamp Quarter, the downtown business center.”
Oops. The privately financed condos aren’t selling well, and the publicly financed office building has not leased out the space it had anticipated. There are big questions: has the presence of the trolley turned off potential condo buyers, as well as those who would pay for space in the office building? Or is the problem the downtown condo market, which some call disastrous and others say is merely slow? Or do the trolley and the ailing condo market share the blame?
Smart Corner occupies the block bounded by C Street, Park Boulevard, Broadway, and 11th Avenue. There is the 5-story office building that, beginning in January of last year, became the $23.8 million headquarters of the San Diego Housing Commission. The commission occupies the top three floors and hopes to lease up the first two. Adjacent is the 19-story, 301-unit condominium project.
The gleaming new Housing Commission headquarters and the condos are supposed to have a symbiotic relationship. The commission has a bank loan on which it pays $1.7 million a year, and $1.1 million of that was to come from parking, office, and retail leases at the 5-story building. Today, only two retailers, Starbucks and 7-Eleven, occupy the first floor, partly because the condos have not been selling and there aren’t as many residents as anticipated. “Market conditions are slower than we expected,” says Erica Rooks, commission spokesperson, adding, “It’s a national trend. Large retail chains are not expanding.”
The second floor, which must be rented to a nonprofit, is still vacant. So the expected $1.1 million annual take is only $457,476, but the commission says it has a cushion; it sold its old headquarters on Newton Avenue to the Centre City Development Corporation — like the Housing Commission an entity of city government — and the sale went for $2 million more than anticipated.
The Housing Commission building has four levels of subterranean parking. “We still have some capacity,” says Rooks, so revenue isn’t as much as anticipated.
Of the 301 condo units, “We have closed on 48 or 49, and we’ve got 19 more in escrow,” says Sherm Harmer, codeveloper of Smart Corner as president of Urban Housing Partners. “We have 25 set aside for affordable housing, and 8 of these are processing now.” Sales began in April 2004, when the downtown condo market was still hot; people began occupying the units in October of last year.
Because the units are selling slowly, “We are going to rent 100,” says Harmer. “We just started renting in December and have rented 45. We expect to rent about 20 a month. I gave everyone that is renting an option to buy. We will help them get a loan.” Overall, Smart Corner “is a moderately priced project for the workforce downtown.”
The phenomenon of condos going rental is one of San Diego’s great ironies. A few years ago, condo conversions, or rental units going condo, were sizzling and considered a scourge by some. Now, downtown, the trend is in the other direction. Several condo projects, including luxury ones, have gone rental. Individuals who own condos but don’t live in them rent them out too. From a societal standpoint, the trend isn’t necessarily bad: “When a condo goes back as an apartment, if the rent is affordable, that is a good thing,” says attorney Cory Briggs, who is suing some apartment building owners who went condo. “If the apartment goes condo, it takes affordable units off the market.”
Harmer says the problem is the downtown condo market. “It’s a slow market,” he says, but not a disaster as others say. Indeed, he believes, “We saw the bottom a month or two ago. The entry-level homebuyer is caught up with the difficulty of getting mortgages, with all the subprime problems. Younger buyers are nervous about mortgages and the economy and jobs and have no urgency. Older buyers have long-term confidence in real estate” and are buying. He believes media coverage has been slanted to the negative. However, he concedes, “The real test will come this summer.”
The County overbuilt homes and condos for a number of years. “We need to get rid of inventory,” he says. Noting that the number of building permits has slowed every year since 2005, he asserts, “There is discipline in the building industry to dramatically curtail production.” New product is not coming online, and stability is coming downtown, he insists. The Smart Corner units will be sold or rented in 18 months to two years, perhaps even earlier, he enthuses. However, Harmer is chairman of the Downtown Residential Marketing Alliance. And he is the 2008 president of the Building Industry Association of San Diego. His optimism is to be expected.
Taking the opposite point of view is Robert M. Campbell, publisher of The Campbell Real Estate Timing Letter, who has had a very good record in recent years: he predicted that the Southern California downturn would be severe at a time when others thought it would be mild. The downtown condo market “can be described in one word which starts with D: disaster,” he says. Prices are now down 30 percent. “At the bottom you will be able to buy at 20 to 30 percent of peak value,” he says. Prices plunged that low in the early 1990s. The supply/demand situation downtown “is the worst of the worst, although maybe South Bay will be worse. Downtown, you have huge supply hitting the market, dwindling demand, severe tightening in the mortgage market, a nasty recession that will possibly be lengthy.”