Down and out in Normal Heights

[DCRogers]

While the newer areas of San Diego capture much of the attention on this site, older neighborhoods were not immune to the effects of cheap credit underlying the famed “bubble”. Consider Normal Heights.

Originally developed in the 20s-40s with small (~1000SF) homes for retirees and low-end workers, the area was uploaded with additional housing during the reign of Mayor “Pete” Wilson, tearing down many small homes and replacing them with slapdash, 70s-era, stucco apartments known (not lovingly) as “dingbats”: cheap amenities, mansard roofs, and tandem parking. Little noticed was that the lack of strong zoning at the time effectively “grandfathered” many of these apartments with condo conversion rights. Not that it mattered… Normal Heights was a gently decaying part of old San Diego when the development action was elsewhere. So it remained a mix of older, small, single-family homes, and newer (and usually rougher, in spite of their age) multi-unit apartments. Fast-forward to the 2000s…

Cheap credit and a replacement of demand in Southern California at the end of the 1990s (high-tech replacing aerospace) and these neighborhoods start to increase in value. First, a virtuous cycle: increased prices, owners fixing up homes, neighborhood gets better, crack houses retreat. (Yes, crack houses… you were expecting San Elijo Hills?) But what about those apartments? It’s not like high-tech workers were waiting in line for the next opening. But what those high-tech workers were waiting for was a chance to own; they would risk a little more of the give-and-take of urban life, and in return, find themselves placed for a shorter commute that would make a Temeculan gasp. Enter condo-conversions!

Granite countertops, sub-zeros, new striping in the tandem parking lots, flapping site flags, youthful sign-spinners, and we’re off! At first, it seemed a win-win, as the historical preservationists cheered the tearing down of the hated mansards, and the high-tech workers got to live in their easy-commute starter “homes”. What’s not to love?

But then, the flippers arrived, and the prices soared, and there weren’t enough high-tech workers to fill them all, and even the high-tech workers that there were balked at paying top-dollar for what were, really, glorified apartments. The rise in values originally fixed up a neighborhood, but then as prices soared, undercut the very people who would have filled those happy homes with happy neighbors.

Well, it’s all market forces, right? In a perfect (“rational”) market, supply and demand immediately adjust, and the supply of happy workers would have set the prices for the incoming conversions. Given the large number of conversions coming on-line, and the good economy, the adjustment should have been smooth. But “flippers” removed large amounts of supply from the market, causing shortages. And these high-tech workers didn’t come here to rent… they wanted to buy! Or they wouldn’t come…

And now, 2007… the high-tech firms decided to expand elsewhere… the workers never came, and some already here left for cheaper pastures… what’s the flipper to do? Here’s a creative response:

4503 HAMILTON STREET, SD – Normal Heights, CA 92116

“This listing is for 4 condo units in a 20-unit complex. Seller is offering concessions to achieve break-even cashflow for 2 years. Buy and hold for the future.”

You want the equivalent of an ARM for a multiunit purchase? This one’s for you! The owner isn’t even trying to sell them individually (as the early sales would likely “move the market” even lower). (I wonder how many “concessions” are needed to make these break-even??). Gutsy for the flipper to nail 4 in the same unit! But as they say in the Ginsu knife commercial: wait, there’s more!

4424 UTAH STREET, SD – Normal Heights, CA 92116

“This listing is for 4 condo rental units in a 14-unit complex. Seller is offering concessions to achieve breakeven cashflow for 2 years.”

Wow… didn’t even change the boilerplate… the only question for me is, was this person set up by the converters, or in cahoots, to take so much of their stock off their hands? (Guess this could even be the original converter!) In any case, I would claim that phony bulk “investors” screwed up, with phony price inflation followed by an all-to-real price crash, what could have been a nice neighborhood upgrade story… the potential buyers have moved on, the apartments likely stand empty for the most part, and another Southern California boom/bust cycle grinds its way forward. At least the cheap apartments with the Mansard roofs had real renters…

[Bugs]

In terms of utility and for rental purposes, the so-called “Huffman” buildings built during the late-’60s and ’70s throughout the North Park and other mid-cities areas were the ultimate. Ray Huffman had the plan and a lot of imitators, and those properties made good rentals, even if their designs were a little boring.

The properties built during the 80’s tried to provide designs that were more consistent in appeal with the single family homes in those areas, bt in the process they drove up costs. Some of those properties were built to “condo specs” and a certain percentage of them even recorded condo maps when they were built. Converting these properties to condo ownership is a no-brainer. Doing the same with many of the older properties that were built specifically for rental occupancy is less intelligent. Espcially the 1-bedroom units.

Flipping the individual units was an okay plan back when the market was increasing. But because these conversions are less desireable overall it should have come as no surprise that they were the first part of the market to feel the effects of shrinking demand. They’ll be back, but not before the better appeal alternatives have recovered enough to make these lesser-appeal alternatives viable.

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