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County’s Housing Demand Outpaces Construction

November 22, 2013

When I look at the long-term demand for housing in San Diego County, I inevitably turn to the San Diego Association of Governments (SANDAG) population and household projections.

In this article, I will concentrate on two age groups that will be dominant factors in the market for housing during the next two decades (2010-2030): the 18-34 year olds and the 60-74 year olds. The first group will be looking for their first “owned” home and the second group will be looking for “move down” opportunities.

In San Diego County, SANDAG projects those two groups will add 350,000 persons between 2010 and 2030, almost half of the population gain in the region. Based on the 2010 U.S. Census persons per household count for those two age groups, demand will develop for 168,000 new units, or 8,400 housing units per year. Those two groups account for more than three quarters of the total demand for housing in the County during the 2010-2030 timeframe. Including the young and the old, the County will need almost 11,000 new housing units each year.

Now, the nasty part: for the past seven years, the County has produced an average of less than half that number and my fine-honed sense of the housing market tells me that in the next ten years, the output will be substantially less than 11,000 units – sale and rental combined.

If we follow the path of the past, more than half of those households will want to own a home or condominium with the balance renting. I want to concentrate on the “for sale” sector of the market. If 55% own, that results in a demand for 5,500 new sale units annually, most of which will be acquired by the young and the move-downs.

The single-family detached sector will be substantially too expensive for most of the young and the move-downs. During this decade, new detached homes in San Diego County will have an average price north of $600,000, well beyond the means of all but a handful of the young and move-downs.

That means that most of that demand will have to be satisfied by the multi-housing sector – i.e., condominiums. You may have noticed that virtually no condominiums have broken ground in this County since 2007.

One would think that homebuilders would be leaping into that market. But there’s a problem or two.

  • First, most of the National homebuilders who were responsible for major condominium development in the County have left town.
  • Second, few sites remain available for major projects. Most of the sites that would ordinarily have been developed with condominiums have been gobbled up by apartment developers.
  • Third, Most of the demand for condominiums is for townhomes and low-rise stacked flats. There is a critical shortage of sites destined for those types of projects.
  • Fourth, the small builders who are willing to jump into the condominium market are finding that sites are few and construction loans are few and far between and most often require more substantial equity than in the past. Thus, it is tough to generate the types of returns required to attract investors, and
  • Fifth, condominium developers, architects/engineers, contractors and lenders are still smarting from the inevitable litigation that was pervasive during the past decade.

Thus, we have a willing market, but a very shy development community.

One other option that must evolve for potential homeowners is the condominium conversion. During the 2003-2007 timeframe, more than 20,000 apartments were converted to condominiums in this County. Today, there are more than 10,000 apartments in this County that have condominium maps and can be readily converted.

As in the new condominium sector, the major conversion players remain in absentia in San Diego County, thought they are alive and well elsewhere on the west and east coast. Slowly, but surely, they will return to prominence in this County. It is only a matter of time. As conversions are inevitably the least expensive option for homebuyers, they will find a ready audience. Conversions are not the perfect answer, but they may be the only answer in this County for moderate priced sale housing.

Obviously, when a rental unit converts to condominiums, it subtracts a unit from the rental pool, but the good news is that new apartment construction is producing thousands of new units in this County and will continue to do so in the future.

As home prices continue to increase (both new and resale), low-density attached for sale housing needs to fill the gap between renting and buying detached homes. It’s a large gap and needs to be filled.

This article originally appeared on the San Diego Daily Transcript.

This article was originally published by Xpera Group which is now part of The Vertex Companies, LLC.

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