Baja California luxury developments go from boom to bust

The condo in the Palacio del Mar development just south of Mexico’s Rosarito Beach spares no luxuries. Travertine tile. Stainless steel appliances. A customized wine rack.

Then there’s the view. On one side is the glittering Pacific. On another, just 30 feet away, is the half-completed shell of an adjacent condominium project. The building looks like an abandoned parking garage, with floors of concrete piled atop one another and steel spikes poking out from the floor.

This luxury condo belongs to Dan McNeil, a Phoenix real estate investor who put it up for sale a year ago after the value of his properties above the border tanked. He hasn’t found a buyer yet; this area is littered with vacation units for sale.

“It paints a picture of a depressed economy, depressed conditions. It doesn’t make it look like a happy place to go live or vacation,” McNeil said of his condo’s lifeless neighbor.

These days, many views in northern Baja California feature both sea and skeleton. Up and down the Pacific Coast from the Tijuana border to Ensenada, the concrete-and-steel frames of half-completed luxury towers stretch up into the sky.

Some of these oceanfront properties are surrounded by piles of garbage, fences and rusting beams. Billboards that once advertised swanky real estate developments are now neglected, tatters of ads hanging off them as if they’ve been shredded by a storm.

This area, about 30 miles south of San Diego, is one more casualty of the U.S. housing boom and bust. As U.S. real estate values inflated during the bubble, American homeowners pulled equity from their properties and put down hefty deposits on vacation homes in planned developments in Baja, driving up prices here. Many of those purchasers were speculators hoping to resell their units before construction was finished.

When the U.S. bubble burst, buyers vanished. So did financing. Some owners walked away, and cash-strapped developers halted projects midway. Thousands of Baja properties are now for sale or for rent, or are only half completed. Real estate experts estimate that prices have fallen 25% to 30% since the peak.

“It was a gold mine to build a big tower on the beach, but once the market tanked, all of a sudden everyone wanted out,” said Jean-Paul de Kervor, chief executive of Maquila Properties Inc., a consulting firm in Baja California.

News of narco killings involving Mexican drug gangs in Baja is also keeping buyers and renters away.

“It’s a double whammy: Mexico is tied to the U.S. economy, then you have the added fear factor of what people read about the drug war,” said Brian Flock of Flock Dream Homes, which sells real estate in San Diego and Baja.

Many American buyers in Baja put 30% to 40% down, which is typical in Mexico, with the balance due upon the completion of construction. Now that the condos are finished, many purchasers don’t have the cash or credit to close their deals, said Kathy Katz, co-owner of Baja Real Estate Group, which represents two of the largest developments on the coast.

“At the time, the demand was there -- we sold out. But now about half the people have pulled out,” Katz said as she walked past squares of Italian porcelain, a tarp and a wheelbarrow in a luxury condo in the Palacio del Mar development.

Most developers have altered ambitious building plans since the real estate slowdown. Although construction is complete on a fifth tower at the Calafia development, developer Groupo Gor is leaving the interiors of the condos unfinished until someone buys them. The floors and walls are gray concrete covered in splotches of white paint. Pipes and wires stick out of the floors.

Down the road in the Club Marena project, developer Marena Pacifico is waiting until the economy picks up to build a third luxury tower. Next to a recently completed tower there’s a deep pit gouged in the soil. Behind it, what locals say is the world’s second-largest statue of Jesus is perched on the hill.

In Las Gaviotas, an older community that features brick homes and tiled streets, about 15% of the 298 homes are for sale, Katz said. During the last decade those properties turned over only occasionally, she said.

At the 72-unit Palacio del Mar, nearly 25% of buyers have defaulted on their contracts. McNeil, the Phoenix investor, purchased his three-bedroom condo for $477,000 after seeing ads for it three years ago on a Baja trip. Then came the economic downturn. McNeil, who owns five rental properties in the U.S., saw his net worth cut in half. He’s now trying to sell the Mexican condo for $439,000.

After 20 years of visiting Baja with his family, McNeil says he’s finished with the seaside community.

“I am pretty certain that I won’t be investing any more money in that area for a long time,” he said.

Judging by the half-completed buildings that dot the coast, many other would-be Baja residents are in the same position.

There’s the gigantic Residences at Playa Blanca, which advertises “24-hour gourmet dining” and a “world class spa” on banners next to the highway, but which remains frozen in construction, scaffolds and pipes lined up on the grounds. The fortress-like condos at Las Olas Mar y Sol, which sit next to a steel skeleton structure, are surrounded by piles of trash.

Perhaps the best-known such flop is at Trump Ocean Resort Baja, a luxury hotel-condo project developed by Irongate Wilshire and PB Impulsores. Flamboyant real estate tycoon Donald Trump licensed his name to the resort, whose units sold for as much as $3 million in splashy pre-construction sales events.

But the project was never built. All that’s visible now is a fenced-in hole, faded pink Trump Baja banners waving in the breeze. Buyers, who are out $32.2 million in deposits, sued Trump and the developers last year.

The real estate bust and tourism slowdown have crippled businesses in Rosarito Beach. On the main street, Boulevard Benito Juarez, sushi joints and coffee shops that cater to Americans sit empty. Lupe Perez, owner of El Nido restaurant, says his business has dropped 80% in the last year or so. Still, he has resisted firing staff members.

“This waiter has been here 28 years. He’s third generation. I can’t tell him to just go home,” Perez said, gesturing toward a man clearing off an empty table.

Some observers say the downturn in Baja is just a temporary blip and buyers will come back soon. Rosarito Beach is on the coast, after all, and only about half an hour from San Diego. Prices on three-bedroom condos on the shore start at around $280,000, a fraction of what they’d cost in the U.S.

But the promise of cheap real estate just across the border isn’t quite as appealing when there’s plenty of it to be had in the U.S. too.

“What’s hurting us is that now you can buy a nice Vegas condo for $150,000,” Baja real estate agent Katz said. “We used to be that.”