Four years ago, the houses that Standard Pacific Homes was selling in its Sorrento community in Salinas, Calif., fetched more than $800,000. Today, homes there are selling in the high $300s and low $400s--a significant discount--and still are having trouble finding customers.

Salinas is in Monterey County, one of the most desirable—and expensive—places to live along the West Coast. “It’s been very lucrative for developers, because demand has always outstripped supply,” says Anthony Lombardo, a partner in Salinas-based Lombardo & Gilles, one of the area’s go-to law firms for land law issues. As in any coveted area by the sea, “there just aren’t enough places to live” in Monterey and its surrounding towns, Lombardo says.

But last year, the county’s absorption rate was only 100 new homes, “and we had more than half of those,” says Tom Burrill, StanPac’s Bay Area division president. And since the beginning of this year, selling activity at most of the area’s residential communities has all but stopped, despite a dearth of new and existing homes on the market, according to local developers and market watchers. These sources observe that neighborhoods affected by this buyer scarcity include Shea Homes’ 429-acre, 1,200-plus lot mixed-use community University Villages in Marina, Calif., which has been a central component in the ongoing redevelopment of Fort Ord along Monterey Bay.

To drum up business, builders and developers have taken some drastic steps. Monterey-based Woodman Development’s The Commons of Rogge Road originally offered workforce housing at significantly below market rate. But once the housing market collapsed, competitors’ market-rate homes were selling for less than Woodman’s product, which had workforce restrictions, according to William Silva, Woodman’s CEO. So his company went back to the city’s planning board for an entitlement adjustment on its 45 single-family homes (it covers its inclusionary obligations with 48 apartments), which are now priced from $199,000 to $266,000, compared to between $270,000 and $490,000 before the change.

Even Clint Eastwood, Monterey’s most famous celebrity and a developer in his own right—he’s a principal in the Pebble Beach Company, which develops golf-course communities—is yielding to market realities. His 2,000-acre Tehama development recently pulled its remaining 33 lots—priced from $3 million to $7 million each—off the market because they weren’t finding buyers. “Those lots might not come back onto the market for 12 to 24 months,” says Alan Williams, president of Carmel Development Company, which is partnering with Eastwood on this project.

Lombardo says that even the “super-expensive stuff” has come down by 25% to 40%. His firm was recently involved in a deal for a house that once was priced at $12 million, but sold for $9 million. “It’s a price-driven market, and you have to price your houses to sell immediately, because if you start discounting, buyers will just wait a few months to see if the price drops some more,” says Chris Tescher, whose Carmel-based construction company builds custom homes that range from $2 million to $4 million.

The county’s economic straits aren’t helping matters, either. Its two largest industries, agriculture and tourism, which each generates around $1 billion annually, have suffered during the current downturn, which is manifested by the county’s nearly 18% unemployment rate.

However, there are myriad other factors that present challenges to residential development, construction and sales in Monterey County:

•The area’s no-growth sentiment: Three-fifths of the homes in Carmel, and half of the homes in Monterey, are owned by people who don’t live in them full-time. Many of these owners keep second homes here to enjoy the area’s natural environment, or rent their houses to vacationers, so they have a financial and aesthetic stake in limiting development here. Jim Heisinger, a partner with the law firm Heisinger, Buck & Morris, notes that there hasn’t been a new subdivision approved on the Monterey peninsula for a generation.

In Salinas Valley, where most of the production building has taken place in recent years, getting projects off the ground is only marginally easier. Dustin Bogue, a partner with the San Jose-based real estate and development management company Union Community Partners, which controls around 1,700 lots in Monterey County, says his company recently purchased a 40-acre parcel in Greenfield from another “well capitalized” developer who had been trying to get that land annexed since 2003.

A survey that The Concord Group conducted for Union Community Partners a few years ago found that Monterey County has been “chronically underserved” in its housing stock, to the tune of about 1,000 homes per year. Bogue says that what’s selling in Monterey County today is mostly REO property or existing homes, of which there’s less than a three months’ inventory supply, according to California Association of Realtors estimates. “There’s no new product there,” says Bogue. Indeed, Standard Pacific currently is building only around a dozen homes in each of its active communities in the county, and only has another 35 or so lots beyond that, says Burrill.

Escalating impact fees have become a disincentive to development. A number of builders and developers here say that it’s costing them up to $60,000 in fees just to get a house out of the ground, which in an economy that is demanding lower selling prices makes construction economically illogical for some builders.

•Scarce water supply: Water shortages have plagued this county for decades, for a variety of reasons: saltwater intrusion into aquifers, the enormous consumption needs for agriculture, the lack of political will and capital to finance dams or storage facilities. “The county has lurched from one resource crisis to another,” observes Lombardo. And some builders are convinced that no-growth advocates want to limit water access to inhibit development.

It appears that these water issues are coming to a head.

The county’s latest general plan, which different factions have been fighting over for a decade, is likely to finally go into effect sometime this year. That new plan, says Lombardo, “is more restrictive than the previous one” when it comes to preserving agricultural land. In addition, the California Water Resources Board has ordered Cal Am, which provides water to the Monterey peninsula, to significantly reduce pumping from the Carmel River. That order also prohibits new water connections or increasing supply to existing customers.

“If you’re increasing water consumption or reducing ag land, the message [to developers] is ‘go home,’ ” says Bogue.

One solution could be a new desalination plant, which is currently going through the approval process. Most developers and builders here think this plant will encounter opposition from environmentalists and no-growth advocates and probably won’t get built--at the earliest--for several years. “The thinking here is that when you create water, you create development,” says Tescher, the custom builder. “Monterey County doesn’t need any more subdivisions, but there are hundreds, if not thousands, of infill lots that people are paying taxes on but can’t get developed because they don’t have access to water.”

•Intractable banks: Silva of Woodman Development says one of his lenders, First National, “worked with us” to get the selling pricing down for homes at The Commons at Rogge Road. The bank also found another developer that would purchase Woodman’s other 78 lots in that subdivision in a short sale. “I have to commend them for that.” However, Woodman has lost most of its 2,000 entitled lots in Monterey County to foreclosure by banks, some of which Silva says have been “hostile” in their dealings with his company. Silva says one bank told him it would accept nothing less than three times his net worth to settle its claim with his company.

“Individually, bankers can seem like nice people, but when they get together with their loan committees, they turn into idiots,” says Tescher. To prove his point, Tescher notes that a year ago he was one of six bidders on a short sale of a house. His $925,000 bid was the highest, but six months after making that offer, he dropped out because “I got tired of waiting.” Four months later, that house sold for $795,000.

In light of such roadblocks, it’s a wonder that any company is still willing to develop and build homes here. But the recession won’t last forever, and land near the ocean can only become more valuable. So intrepid developers and builders continue to pick up what bargains they can find to have product in place when buyers return.

Burrill says that StanPac is looking for land “selectively,” and is finding finished lots selling for between $50,000 and $75,000 before fees. Carmel Development is planning a new community, Rancho Canada Village, with 180 home sites. Another project—Bella Terra in Soledad, which had been in receivership—was recently taken over by a local builder, Michael Fletcher, who reportedly paid less than $4 million for 12 partially completed homes, three models, and 58 entitled and finished lots, all on 18.5 acres.

Union Community Partners is fishing for finished and even raw lots. It is also attempting to jumpstart East Garrison, a 1,400-lot community at Fort Ord, which had been the possession of William Lyon Homes. Bogue says this deal pencils out for his company because “we were able to purchase $80 million worth of property for one-third of the price.”

John Caulfield is senior editor for BUILDER magazine. Alexander Heisinger, a research associate with Hanley Wood Market Intelligence, contributed reporting to this article.

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