The number of apartment transactions continues to fall in San Diego County and prices may have held their own, depending on how the numbers are calculated.

“Even though 2006 sales volume was down significantly since 2005 and 2004, average countywide sales prices were still above the record-high prices set in 2004,” said George Carlson, a Burnham Real Estate apartment specialist.

Carlson suggested while there has clearly been a decline in interest in the acquisition of apartments for condo conversions, the basic fundamentals for a strong apartment market remain strong. This strength is a result of positive population growth as the result of more births than deaths, (a factor that counteracted a net out-migration) and a limited supply of affordable housing.

Burnham reports the average countywide unadjusted sales price for San Diego County apartments was $170,722 per unit in 2006, down 3.8 percent from $177,189 in 2005, but up 2.7 percent from the average selling price of $166,153 in 2004.

The unadjusted average selling price of apartments within the city of San Diego was $207,266 in 2006, up 7.5 percent over 2005’s average selling price of $192,765 per unit, and up 6.2 percent over 2004’s average price of $195,067 per unit.

The story is quite different when “super mega” deals — transactions involving 100 or more units are taken out of the countywide equation, however.

When these prices are removed, the average selling price for the county was $133,267 in 2006. This was down some 13 percent from $153,246 in 2005, but down just 3 percent from $137,394 in 2004.

The average adjusted selling price within the city of San Diego was $146,384 in 2006, down 13.2 percent from $166,474 in 2005, and down a mere 1.7 percent from $148,982 in 2004.

“The ‘adjusted’ figures avoid the upward skewing effect that the super mega deals can have on pricing,” Carlson said. “In 2006, there were seven such sales in the county involving a total of 2,610 units. This compares to 2005, when there were 16 such sales involving 3,643 units, and to 2004 when there were also 16 such sales, but 5,246 units involved.

When the Burnham apartment study began 21 years ago in 1986, the average countywide price per unit was just $48,303. In 1996, 10 years after the study began, there were four sales involving units of 100 or more units that sold for slightly more than $100,000 per unit.

“Because the upward skewing effect on average sales prices could be misleading, we began showing the overall average countywide selling prices, as well as adjusted citywide and countywide prices with the mega deals excluded,” Carlson said.

In 2004, 2005 and 2006, Burnham found 82.5 percent, 91.5 percent and 83.3 percent of the transactions sampled, respectively, involved projects with five or more units and prices in excess of $100,000 per unit.

“The huge demand for units drove pricing to such high levels across the board that the mega transactions become obsolete,” Carlton added. “As a result, in 2004, we implemented a ’super-mega’ designator for projects with 100 or more units that are selling for $200,000 per unit or more.”

He said capitalization rates have gotten so low as to discourage investor interest, even when interest rates are low.

“The condo conversion craze clearly was the root cause of the exorbitant and otherwise inexplicable per unit average selling prices and GRMs (gross rent multipliers) of the past several years,” Carlton said. “Investors were buying candidate properties at prices that made no economic sense as apartments.”

A gross rent multiplier is a property’s sales price divided by the amount for which it can be rented.

Now with the condo craze largely over, Carlson said apartments have to survive on the market based on their own merits.

Of the 33 city and county sub-areas surveyed by Burnham in 2006, 10 reported increases during the prior year, 20 reported price decreases and three were unchanged because of no sales in one year or the other.

Noteworthy 2006 area decreases were: Golden Hill/Southeast San Diego $102,772 per unit, down some 25.5 percent from $137,912 in 2005; North Park $131,192, down 12.9 percent from $150,071; Normal Heights-Kensington $126,074, down 18.4 percent from $154,523; El Cajon $112,764 (adjusted) down 18 percent from $137,475; and Escondido $110,552, down 30.6 percent from $159,215 in 2005.

Following several years of frenzied investor buying at record-high prices, San Diego County’s apartment sales declined for the second-straight year in 2006.

Two purchases by The Irvine Co. appeared to top the list of apartment sales last year. The 668-unit Villa Dorado at Mission Valley sold for $182.5 million or $273,203 per unit last summer.

Irvine Co. of Newport Beach also acquired the 473-unit Torrey Villas Apartments in Carmel Valley for $172.5 million late last year. This represented a hefty $364,693 per unit and a 5.18 percent cap rate. Donald Bren’s firm also owns several downtown San Diego and suburban office properties.

Information from: San Diego Daily Transcript.

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