A mortgage payment of $1,600 a month won't buy much of a house in Sacramento. Spend the same amount on rent and you can get a high-end three-bedroom apartment. That would seem like a signal for developers to start building more multifamily housing.

In a way it is, but the money today is in building condominiums, not apartments.

"With land prices and construction costs and rental rates, we find that market-rate apartments are not financially feasible. The condominiums, because of the recent run-up in house prices, are feasible," said Steve Eggert, head of development and acquisitions for St. Anton Partners LLC.

The Sacramento company has developed more than 3,000 apartment units since it was founded in early 1995, and it continues to own and operate most of the projects. It hasn't put any condos on the market yet, but is working on it, said Eggert.

Granite Bay Holdings already has made the switch. Its 323-unit Phoenician condo project in Roseville was originally conceived as an apartment complex.

"But when the market got hot, we discerned a need for a starter home, and that's what condos have become," said Steve Poucher, director of real estate.

The first phase of the Phoenician project, with units of 750 square feet to 1,400 square feet, sold out four months ahead of schedule. For the 190 units in the second phase, slated to hit the market in February, Granite Bay Holdings already has a list of 250 interested people, Poucher said.

Others have caught the condo bug. Giant residential builder KB Home has begun work on Hampton Village in North Natomas, where 264 attached condominiums are expected to start in the high-$200,000s.

A bayward look: As so often is the case with real estate, the Bay Area's recent past is seen as pointing the way to Sacramento's future.

Investment brokerage Marcus & Millichap's national multifamily group in Palo Alto is projecting that roughly 1,400 new apartments will hit the Silicon Valley market this year, the smallest total in six years. Meanwhile, developers are expected to deliver some 1,200 condo units, four times last year's count.

A mortgage payment of $1,600 a month won't buy much of a house in Sacramento. Spend the same amount on rent and you can get a high-end three-bedroom apartment. That would seem like a signal for developers to start building more multifamily housing.

In a way it is, but the money today is in building condominiums, not apartments.

"With land prices and construction costs and rental rates, we find that market-rate apartments are not financially feasible. The condominiums, because of the recent run-up in house prices, are feasible," said Steve Eggert, head of development and acquisitions for St. Anton Partners LLC.

The Sacramento company has developed more than 3,000 apartment units since it was founded in early 1995, and it continues to own and operate most of the projects. It hasn't put any condos on the market yet, but is working on it, said Eggert.

Granite Bay Holdings already has made the switch. Its 323-unit Phoenician condo project in Roseville was originally conceived as an apartment complex.

"But when the market got hot, we discerned a need for a starter home, and that's what condos have become," said Steve Poucher, director of real estate.

The first phase of the Phoenician project, with units of 750 square feet to 1,400 square feet, sold out four months ahead of schedule. For the 190 units in the second phase, slated to hit the market in February, Granite Bay Holdings already has a list of 250 interested people, Poucher said.

Others have caught the condo bug. Giant residential builder KB Home has begun work on Hampton Village in North Natomas, where 264 attached condominiums are expected to start in the high-$200,000s.

A bayward look: As so often is the case with real estate, the Bay Area's recent past is seen as pointing the way to Sacramento's future.

Investment brokerage Marcus & Millichap's national multifamily group in Palo Alto is projecting that roughly 1,400 new apartments will hit the Silicon Valley market this year, the smallest total in six years. Meanwhile, developers are expected to deliver some 1,200 condo units, four times last year's count.


"The south Placer County market and the midtown Sacramento market are more conducive for the for-sale product, mainly because of the demographics. Also the cost of the land," said Poucher.

Downtown Sacramento has sparked interest for high-rise condos, considered a different product than the wood-frame construction typical in the suburbs.

KB Home has targeted downtown Sacramento for condo construction next year through its new KB Urban division. As reported in the Business Journal last month, KB expects to look for downtown sites next year where it can built condos that would sell at $400,000 to $800,000 per unit, mixed in with retail and possibly offices and hotels.

D.R. Horton Inc. also is planning a high-rise on I Street, and developer John Saca has included condos in his plans for rehabbing some stores on the K Street Mall.

Looking ahead: Even though the market for single-family housing seems to have it hit a peak locally, that won't likely swing interest back to apartment construction, observers agree.

"There are a ton of homes bought by investors, single-family and condos," Eggert said. "Many investors will have difficulty unloading their homes, so they will rent them out at prices that will put downward pressure on the market."

As long as residential construction continues at its recent volume, that too will put downward pressure on rents, he said. At the same time, because the market has embraced condominiums, people can afford to pay more for the land and more for construction costs, and that in turns drives up the cost of land.

"There's another huge component of this, and that's the baby boomers. They are starting to downsize," said Dave Macintosh, an analyst with real estate data and consulting firm Hanley Wood. If empty-nesters don't want to scale back to a low-frills starter home, a fancy condo may be the answer.

"One of the things that fascinates me is who is our home buyer," Poucher said. "They are either in their late 20s-early 30s, or they are above 55."

The insurance snag: One factor that could sour some apartment builders on the condo market is insurance. The requirements on condo construction are much stiffer because condos have a long history of generating litigation.

It was a big discussion point among speakers at a developer conference that Poucher attended this fall in San Diego.

"Every single one of them said that your decision on whether you want to do for-sale will be determined by insurance and whether it could be issued," he said. One speaker advised developers to budget $500,000 to $1 million just for the attorney fees that might be needed on a condo project.

Some developers see the potential profit margin and are willing to take the risk, and some aren't, said Poucher.

Macintosh said he has heard of some who switched plans in midstream, to their regret.

"What was happening is they would go through the entitlement process, submit the project as an apartment," Macintosh said. "They'd even start constructing it as an apartment and thought they would make more money as a condo."

But the new insurance requirements crossed them up.

"A lot of times you need different subs," Macintosh said. "Just because you have a guy who pours foundations, he may not be the same guy who pours it for a condo as for an apartment. Does that guy have the insurance?"

Yes, insurance is expensive, but there seem to be more companies willing to provide it and the price seems to be coming down, said Eggert of St. Anton.

"It's definitely less of an issue with concrete frame than wood frame," he said.

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