From www.sddt.com:

Sales of San Diego condominiums have emerged as perhaps the market’s lone bright spot.

Driven by a confluence of factors, investors and traditional buyers alike have identified value in the submarket, pushing activity beyond its year-ago level while virtually all else has lagged on an annual basis.

“It’s been a remarkable year downtown,” said Alan Nevin, principal at London Real Estate Advisors.

While the increase in condo resales downtown is modest, that’s compared to a pronounced decline among sales of attached units in the rest of the county.

Through 10 months of 2011, buyers have purchased 811 condos in downtown’s 92101 ZIP code, according to the San Diego Association of Realtors (SDAR). That’s 6 percent more than through the same period a year ago, when 765 such units were sold.

Meanwhile, 8,091 attached units have sold in the rest of the county’s ZIP codes combined so far this year, or almost 10 percent fewer than the 8,944 sold through the same period last year.

That increase in activity is driven in part by cash purchases, which accounted for 38 percent of all downtown condo resales in both the second and third quarters of the year and 47 percent in the first quarter, according to numbers from the County Assessor’s Office.

Nevin said foreclosures have both fed the ZIP code’s supply of condos while also depriving it of qualified buyers. Without borrowers that can meet current lending standards, prices steadily declined over the last few years.

“So now we’re at a point that an investor can buy a unit all cash, rent it out and have nice cash flow,” Nevin said. “It becomes a reasonable investment because they can get between 4 and 6 percent cash-on-cash in the rental market for four to five years, and at some point the market will come back and they can sell it. That’s the basis of their investment. There’s no one there to spin them, to do a six-month hold or some such thing.”

For the same reason that prices have fallen — a dearth of qualified investors — so too has the rental market heated up. Vacancy rates have reached their historic floor, and rental rates have risen in kind. That’s how investors have managed to count on a steady, competitive cash flow, even as the properties began to be identified as values.

But as this increased activity has eaten away at the supply of distressed condos, it’s possible the opportunity for value-minded buyers has passed.

Standing inventory in the 92101 ZIP code is currently at 247 units. That number was over 600 at this point a year ago, and that was with new units under construction and scheduled to hit the market.

Now, what remains of those new units are included in the total inventory, and nothing else is being built.

“There’s not a lot of inventory and there are no cranes on the ground,” said Raye Scott, whose team at Windermere Signature Properties is on pace to close nearly 50 sales of condos in the submarket this year.

Instead, downtown’s supply comes in the form of distressed properties.

Short sales represented 23 percent of transactions in the third quarter, compared to 25 percent in the second quarter and 21 percent in the first quarter. Another 13 percent were real-estate owned (REO) or bank owned in the third quarter, with 11 percent in the second quarter and 10 percent in the first quarter.

Together, more than a third of the condo market owes itself to borrowers defaulting on their mortgages.

“We still have foreclosures, but they’re being released in a measured way,” Scott said.

For fear of causing a significant negative price shock, banks have elected to gradually mete out repossessed properties over a period of years, rather than all at once. This process of dealing with the nation’s “shadow inventory” could take until 2020, according to CoreLogic.

Having previously expressed skepticism that the shadow inventory was as large as has been speculated, Nevin said downtown can’t count on a steady stream of new distressed properties, since the foreclosures and short sales feeding it came from loans originated between 2004 and 2007, and would have already reached the market if they were going to.

The opportunity for buyers might be over, he said.

“The major problem is one of an absence of inventory, in terms of how long this can last,” Nevin said. “It may be the end of the ball game, in terms of availability. The reality is, pretty much, if a unit hasn’t been foreclosed out by now, it won’t be.”

But Scott, pointing to the 36 percent share of distressed sales in the third quarter, said opportunities remain.

“If you have patience or it’s just an investment there are still plenty out there,” she said.

Her advice to those looking to sell in the next three to five years, once the market assumedly recovers, is to buy square footage and a view. “When market comes back you’ll have commodities that help yours go up faster,” she said.

Pending litigation on many of the downtown properties has also depressed prices in the area.

Fannie Mae, Freddie Mac and the FHA won’t sponsor loans in buildings with litigation pending that relates to structural issues, and those entities now hold more than 90 percent of all loans. Also, buyers are naturally wary of buying into a building with litigation concerns.

Most downtown condo high rises have been saddled with structural litigation concerns, though some are now thought to be nearing resolution.

Scott said she had a deal that was recently delayed for a month because she was forced to approach three lenders to structure financing for a loan with a 50 percent down payment because of the litigation pending against the building.

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