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.”

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Comments

Don Bauder March 5, 2008 @ 4:16 p.m.

Response to post #1: No doubt you have noticed how little you read in mainstream media, particularly the U-T, about the downtown condo calamity. Best, Don Bauder

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Anon92107 March 5, 2008 @ 12:56 p.m.

Sounds like the "Smart Corner" will be the latest monument to three successive mayors the Davies/U-T Machine corruption created.

That of course adds to San Diego Firestorm Monuments throughout San Diego county by the 2003 and 2007 firestorms due to larceny by the Davies/U-T Machine.

The Davies/U-T Machine corruption monuments should provide a volume of graphics for Erie's book.

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Justice4all March 5, 2008 @ 2:15 p.m.

What a mess. So out of 301 condos, only 49 are sold and 19 in escrow but Harmer says "its not a disaster." Yeah everyone loves the homeless people in front of their condo, that's a big plus. This is why the government should not get directly involved with RE development.

In places like SF, Boston, NY having a trolley out front is a big plus since everyone takes public transportation. In SD where everyone drives and the trolley has a very limited range, it provides a negative instead of a positive.

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Don Bauder March 5, 2008 @ 4:23 p.m.

Response to post #2: I lived in Cleveland for seven years. Back then (1966-73) it was said that neighborhoods near the rapid transit running through upscale Shaker Heights (called "The Shaker Rapid") enjoyed better real estate markets than neighborhoods not within walking district. In Cleveland, taking transit was a habit; almost everybody did it. Ditto Chicago when I lived there. I am a believer in transit. The more San Diego builds expressways, the more crowded they get. But it takes education to convince the populace. The Smart Corner's main problem, I believe, is the very bad downtown condo market. The neighborhood doesn't help, but that will change. Best, Don Bauder

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Anonymous March 5, 2008 @ 10:44 p.m.

Hi, welcome to Hooters.

this city sucks

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JohnnyVegas March 5, 2008 @ 11:04 p.m.

Real estate goes in cycles. We are in a serious downturn, and it will stay that way for 2-3, maybe even 5 years, and then it will boom again. So it is a smart move to rent the units out.

Back in the last severe downturn, 90-96, the condos downtown (not many) and commercial space on market dropped like crazy. A good example was the Palladian indoor shopping mall right across the west (bayside) side of Horton Plaza-built for $37 million. Completed in 92 and promptly went BK, was sold by the bank for $7 million dollars in 94.

But, if you could hang on and could ride out the bad times you were OK.

Example, the owner of the condos right across from the Convention Center (and Market Street-3 story brick facade) had a 50% equity stake in his property, and did not lose it to the bank. He cold not sell them so he rented out the units, and when the market turned 8 years later in 2001 he converted them back to condos- and made a fortune.

So, only time will tell.

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Anon92107 March 6, 2008 @ 2:56 a.m.

Response to post #6: Sure hope everyone in San Diego has five years of spare liquidity in buckets to ride out the "downturn" until the "boom" returns. And that we still have police and fire departments at the end of the 5 years.

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Don Bauder March 6, 2008 @ 7:39 a.m.

Response to post #5: Is that what goes on at Hooters? I've heard about the attraction, but never been to one. Best, Don Bauder

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Don Bauder March 6, 2008 @ 7:49 a.m.

Response to post #6: Good point. If you can afford to hold on, your investment might pay off. One problem with that strategy is that San Diego home prices zoomed so high -- including downtown condos -- that the price plunge, already near 20 percent, could go much further, making recovery more difficult. Another problem is the high rate of foreclosures now. Downtown condo owners who foreclose are not paying their homeowners association dues. Those have to be paid by other residents -- adding further strain to the shaky market. Best, Don Bauder

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Don Bauder March 6, 2008 @ 7:54 a.m.

Response to post #7: You also make good points. With the City in such financial turmoil, will there be sufficient police and fire services downtown? Will retailers spring up, especially since a high percentage of the owners are part-time residents? Downtown condos are basically a good idea, but the boom got out of hand and is now deflating. Best, Don Bauder

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rexl March 6, 2008 @ 10:24 a.m.

particularly nice having the housing commission on the top three floors. that makes for a nice neighborhood. o will this be stopped by the pc police.

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Don Bauder March 6, 2008 @ 10:30 a.m.

Response to post #11: Hey, the housing commission now has the best building of any branch of City government. Of course, the commission has to service the mortgage. Best, Don Bauder

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Anon92107 March 6, 2008 @ 11:33 a.m.

Response to post #10:

Drove by "Smart Corner" this morning, it looks like "Dumb Corner" now that I read your column, another concrete monument blight on the San Diego landscape now.

But the really bad joke is on the people of San Diego who are screwed again by the Davies/U-T/Sanders Greed Machine ad infinitum as long as the corrupt courts keep trashing the rule of law with hellaciously destructive impunity.

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JohnnyVegas March 6, 2008 @ 11:47 a.m.

7.

Response to post #6: Sure hope everyone in San Diego has five years of spare liquidity in buckets to ride out the "downturn" until the "boom" returns.


You just identified the major problem, no one has the equity in their properties to ride out the bad times, because of the non-existant underwriting standards the lenders were using.

85% of the loans in 2003-2006 were to unqualified buyers with little-IF ANY- money as a down payment. Since the feds allow mortgages to be bundled and then sold on the market as mortgage backed securities there was no incentive for lenders to provide good, quality loans. The lender would wash their hands of the bad loans as soon as the ink was dry-unloading the bad loans on the market and unsuspecting investors. Many of those investors were hedge and equity funds who are now really getting their clock cleaned on them.

In the old days saving and loans would make a mortgage/trust deed and then they would keep the loan and service it themselves-so they had good reason/incentive to make sure the borrowers were credit worthy.

I have said it before and will say it again, this real estate market was not created by jobs-which virtually every other real estate boom was created by. It was created by low interest rates from 99-2002/3, and from 2002-2006 it was maintained by bad loans, loans with no underwriting criteria to qualify buyers.

That is a recipe for disaster.

Greenspan deserves much of the blame, and so do bank regulators for allowing the underwriting of the bad loans. Now we have a credit crunch that is causing harm that is 100 times worse than the benefits the bubble created.

Time will tell how the story ends.

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Anon92107 March 6, 2008 @ 12:35 p.m.

Response to post #14:

Talk about the end of an era:

“Homeowner equity is lowest since 1945” By J.W. ELPHINSTONE, AP Business Writer http://news.yahoo.com/s/ap/20080306/ap_on_bi_ge/home_equity;_ylt=AuJ6QflPgYh5eYklCp4thL2s0NUE

Well this sure doesn’t help, the snowball coming down at us is getting bigger, faster, and it's made out of concrete.

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Don Bauder March 6, 2008 @ 12:46 p.m.

Response to post #13: When the downtown condo market clears, Smart Corner will look better. But I'm afraid the market won't clear for a very long time. Best, Don Bauder

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Don Bauder March 6, 2008 @ 1:04 p.m.

Response to post #14: Excellent observations. The fact that the lender would make the loan and quickly sell it off to a faceless entity on Wall Street is greatly responsible for America's deep woes. Nobody took responsibility for the loan: 1. To make sure it was written for someone who could afford it; 2. To monitor the progress of the mortgage if the borrower fell behind. Keep in mind, too, that much of the downtown condo bubble was created by government. It was a result of the ballpark vote of 1998. John Moores promised to build hotels whose T.O.T. taxes would pay for bond debt service. He was also going to make sure a few other buildings were built. But at the last minute, he got council's permission to change the mix. He didn't provide the hotels. He sold land at a fat price that he had got for cheap early 1990s prices. Condo developers paid dearly for that land and then built and sold the condos into a bubble. Moores got a great return on his money and ran. Mainly condos were built -- vastly overbuilt. Government plans often go sadly awry when market forces aren't considered. The ballpark only contributed to some condos being built in a small area in the ballpark district. They are ones with the highest vacancy rates. The very low interest rates really touched off the condo boom over a wide portion of downtown, including Little Italy. Those interest rates, too, were artificial. So you had two artificial forces. Best, Don Bauder

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Don Bauder March 6, 2008 @ 1:08 p.m.

Response to post #15: Yes, it just came across the wire today that for the first time since 1945, Americans have equity of less than 50 percent in their homes. And home prices will go down further -- a lot further. And in San Diego, a VERY lot further. Best, Don Bauder

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dawn3333 March 10, 2008 @ 11:46 a.m.

Isn't it odd how all these city agencies, or city government and non-profit work together so well for each others benefit. Also that somehow all these home loans that are so easy to get cannot be gotten by some, and also that the affordable housing that is supposed to be being built is not so affordable.

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Don Bauder March 10, 2008 @ 12:28 p.m.

Response to post #19: You make excellent points. The housing commission's building is tied economically to the success of the condo tower. One of the commission's primary missions is affordable housing. Yet the condo tower to which the commission is tied has only 25 units out of 301 set aside for affordable housing. Best, Don Bauder

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