By Jonathan Horn, UT San Diego
Aug. 23, 2014
On a hill overlooking the massive freeway merge near Carmel Valley, construction workers are building what appears to be the kind of complex that would soon be decorated by tall balloons and “for-sale” signs.
Balloons may ultimately fly above the 100 new townhouses that make up the complex dubbed Ocean Air, but any signs hoisted would be for advertising leases, not sales.
The development, by longtime for-sale homebuilder MBK Homes, is the company’s first foray into the rental market. And it’s doing it with a somewhat risky project. That’s because the $40 million Ocean Air complex isn’t going to consist of the traditional stacked flats, where as many units as possible are jammed on top of each other, connected by staircases in common areas.
The complex is coming online at a time when the county’s for-sale housing market has slowed. In July, for instance, home sales were down 18.5 percent from the same month in 2013. Demand for rentals, however, is strong, with the county vacancy rate at 2.8 percent. MBK is looking to fill a niche in the Carmel Valley area, where its executives see demand for rental units that mimic the larger kinds of homes that are usually built for purchase.
At Ocean Air, the complex’s three-level townhouses have been created under condo building specifications, with neighbors only to the side.
“The beauty of this is that it’s not for sale, it’s a rental property, but you get the same level of finishes and the same product type that you would normally see in a for-sale development,” said Josh Harnett, MBK’s director of apartment operations. “Usually on multifamily or apartment projects you’re stacked on top of each other and there’s at least three levels of apartments, they’re smaller flats.”
The complex is holding its first public viewing today, where prospective renters will put on hard hats and walk the site, as if they were prospective owners. The first move-ins are planned for October.
Rick Fletcher, vice president of sales and marketing for the newly created MBK Rental Living, said the renters who choose to lease at Ocean Air wouldn’t want traditional apartments — they have the owner mentality, but don’t want to own. That’s either because of lifestyle changes after the Great Recession, they want flexibility that comes with a lease, or they don’t want to or can’t make a huge down payment.
“More and more people are choosing to lease, and we fill that niche for them,” Fletcher said.
The developers also believe the Carmel Valley area is the perfect location for this kind of nontraditional complex. The area has little supply of townhomes to rent on the secondary market, but it attracts families who need more space and want to be within the sought-after Del Mar Union School District. It’s also located near high-paying employers like Qualcomm and about 50 biotechs in the Torrey Pines region, meaning people could afford rents that range from $2,390 to $3,420 a month. The county average rent is $1,587 per month, said Alan Nevin, an apartment industry analyst at Xpera.
“There are thousands of apartments in Carmel Valley, but all are traditional,” said Nevin. “The big problem is that the vacancy rate effectively is really zero on the for-sale housing that is for rent. If you go to rent a condominium, somebody’s condo, there just aren’t any.”
While the market may be there now, Nevin said the big risk for MBK Rental Living is that it can’t get as big of a return on its investment by renting units with an average 1,323 square feet. He said it’s very rare for a developer to build townhomes designed to be rented.
“It really doesn’t make a great deal of sense as a rental unless you have an endgame in mind,” Nevin said “To do townhomes as a rental is more costly. It’s just a matter of cost per square foot because when you’re building a set of stairs inside a unit, there’s a lot of wasted space. And obviously it’s a lot more complicated to build something with stairs on the interiors, then build stacked flats, where every unit is up and down.”
Nevin said he thinks the move to rent the units first is a good play because there’s almost zero supply of similar units in Carmel Valley, but still demand. “They’ll have cash flow coming in, and then they can sell it to a converter, and basically make a killing,” he said.
With the units built as condos, MBK Rental Living has filed the necessary paperwork with the state to create a homeowners association should they be converted to an ownership model in the future. Fletcher said, however, that there are no plans to convert the units. He said he believes the units would sell starting at $750,000 if they were put on the market, above the county’s $603,000 median price for a newly built home in July, according to CoreLogic DataQuick.
Countywide, Nevin said there aren’t too many other complexes built in the same style as Ocean Air. He said sometimes developments of townhomes for rent happen because of a change of plans, such as when a for-sale builder runs out of money halfway through construction. That was the case in Oceanside, with Piazza d’Oro, which last sold for $81 million in 2013.
The original developer, K. Hovnanian Homes, was building the complex as a for-sale project, but when the recession hit, the company sold the property, including 32 partially completed units. That complex, which has a pool, was finished in 2011 as rentals, and is now owned by TruAmerica Multifamily, where rents are currently advertised from $2,125 to $2,550.
Lynn Owen, TruAmerica’s director of asset management, said the complex caters to those who tend to stay longer because of ties to a school district, or renters who want an ownership feel, but flexibility to move.
That feeling is the one that MBK Rental Living is going for with Ocean Air. For instance, the first residents will be able to customize the colors of one of the living room walls, as if they were designing their own home. The units have other features that are usually the kind that come with for-sale properties, such as the attached garages, multiple staircases and tankless water heaters.
MBK Rental Living is developing a second project in Corona, but Harnett said it’s the more-traditional complex.