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18 years ago

Our downtown condos could
Our downtown condos could end up being our affordable housing.

What’s different about a condo project vs. a residential subdivision is that once they break ground, a condo developer must complete the project and sell it off before they’re out of it. They’re committed to the entire project, and because of the manner in which the construction loans are structured, they have to pay the loans off as they sell the units – there are no profits until after the loans are retired. It is the proceeds from the last few units that comprise their profits.

A subdivision developer can do their project in phases, and doesn’t have to put in site improvements like streets and grading and such until they’re ready to build – so they can hold a portion of their project site as raw land or grade the lots and sell those off to other developers or individually to owner-builders. The holding costs are still expensive, but nowhere near as bad as the holding costs for completed units.

I’ve heard that a couple of the condo developers intend to rent their units out while they wait for better times. Good luck on that. If a unit that would have sold for a mortgage payment of $3,000 month will only rent for about 1/2 that – before expenses – all renting the units out will do is to reduce the negative cash flow. It would only be feasible if the developer thought prices would recover and increase in 2 years or less.

The point I’m meandering to here is that once started, most of those condo units will not only come to market but will be under tremendous pressure to sell regardless of the price. Especially if the market is in decline when they come online. Holding (at a loss) won’t be an option the lenders will be able to tolerate. If that happens, I think the resulting prices will help out our affordable housing situation.

San Diego
18 years ago
Reply to  Bugs

The downtown condos were
The downtown condos were always expected to be affordable, hence the apartment quality finishes. Look at the original selling prices. It was the flippers that drove up the prices.

What will happen is that the marginal sites (East Village) will not get built. No lender will put millions of dollars into a tower and then sit on it. Basically, anything east of 9th Avenue is probably going to sit for awhile.