- Real Estate
Despite depressed housing conditions, closed retail spaces and a lagging job market, McMillin Cos. stepped up its drive Wednesday to get started on a massive, $4 billion, mixed-use project in Otay Ranch, which it is dubbing “Millenia.”
Company executives unveiled a marketing campaign at a VIP reception aimed at interesting investors and piquing the interest of potential buyers, office users and retail tenants three years down the road.
Todd Galarneau, vice president of project management, said the project will not break ground until McMillin secures equity partners and construction financing, but he said that could happen within the next six months, leading to the first home sales in early 2012.
“We’re waiting for values to support the development costs and the lending environment to normalize, as well,” Galarneau said. “The test is to balance costs with revenues. That’s what we’re trying to look at — how to phase the project, what portion we can get at early, keep the costs down and then accelerate for coming out of the ground.”
As part of what is called the Eastern Urban Center, Millenia — purposely spelled without a second “n” — gained Chula Vista’s approval in September. The 20-year plan calls for 2,983 condominiums and townhouses; 3.5 million square feet of commercial space, including a hotel; and six parks, a library, school, fire station and transit station. The high-density development on 210 acres lies east of state Route 125 and south of Birch Road and the Otay Ranch Town Center mall.
Galarneau declined to specify how much funding is needed to start construction but said McMillin probably would provide equity in addition to what investors offer. In such a scenario, developers typically then go to commercial or institutional lenders for construction loans to cover initial grading, sewer and water lines, roads and other infrastructure. Building sites are then sold off to developers to construct homes and commercial improvements. McMillin’s commercial and residential divisions probably would be part of the builder pool.
Chula Vista Mayor Cheryl Cox welcomed McMillin’s announcement, saying her city was the first to face the housing downturn and is now ready to lead the region on the way up. She compared Millenia with Liberty Station, McMillin’s conversion of the Naval Training Center in Point Loma into a residential, commercial and arts complex, a symbol of San Diego’s conversion from defense industry dominance to a broader-based economic mix in the wake of the 1990s recession.
“To put that kind of mixed-use product in is what made Liberty Station so successful, and McMillin has a proven track record of doing things right,” Cox said.
Galarneau said that since fall, the company has submitted documents to certify the project under the U.S. Green Building Council’s LEED program for environmentally sustainable and energy-saving features, applied for grants and developed a presentation for the Western builders show in San Francisco this spring.
Meanwhile, there are signs that South Bay might be ready for new construction after five years of declining prices, thousands of foreclosures and a slowdown in commercial activity during the recession. MDA DataQuick reports that median single-family home prices bottomed out last year and appear to be on the rise. Foreclosures and defaults have fallen, though they are still higher than historic norms.
“We’ve seen a stabilization of values in Otay Ranch,” Galarneau said. “That was probably in the first or second quarter of last year.”
He suggested that by 2012-13, home prices and the economy will have recovered enough for first-time buyers and empty-nesters — the target audience for Millenia — to try out living in a new suburban community with an urban flair. Millenia’s master plan calls for densities of up to 40 dwelling units per acre, roughly six times that of typical single-family tracts.
His strategy was endorsed by two market watchers, Gary London and Jeff Meyers, who said McMillin’s timing may be perfect, if not a little too conservative.
“The market will more than likely be ripe for new product in about three years,” said London, who heads London Group Real Estate Advisors. “Certainly, they shouldn’t be in a hurry, but we’re going to reach a crisis milestone in approximately three years when the recession is a thing of the past, the local economy is resurging and there’s no new housing. Otay Ranch is uniquely positioned to accommodate reasonably priced homes in a high-quality community — almost without parallel and probably without competition.”
Meyers, who heads Meyers Builder Advisors, said McMillin actually could speed up its schedule by about a year and hit the mark even more accurately. Buyers of new homes now pay 10 percent to 20 percent over the price of foreclosures and other distressed properties because they receive warranties from builders and do not have to worry about a home that has been trashed by its previous owners and tenants.
“The consumer is getting impatient,” Meyers said. “Short sales (homes sold for less than their mortgage balance) and foreclosures, while they might be priced attractively, are not always what they’re cracked up to be.”
Although McMillin originally intended to build Millenia’s residential and nonresidential components concurrently, Galarneau said it is more likely that the homes will have to go first. London and Meyers said buyers will accept that phased approach as long as it is clear that the community amenities, shopping and workplaces come online within two or three years of moving in.
“I think housing can stand on its own,” Meyers said. “Obviously, though, with good, strong, mixed-use projects, that can influence the price of those units if they are truly well-executed in a lifestyle center.”
Roger Showley: (619) 293-1286; email@example.com