Why Santa Cruz builds rentals, not condos — and what it means for first-time homebuyers

In the city of Santa Cruz, the dream of first-time homeownership has eroded. The median single-family home in 2024 sold for a dispiriting $1.5 million (the average was more than $1.7 million). Hope falls further away when one considers that Santa Cruz County also boasts the least affordable rental market in the United States.

For many, the housing affordability crisis has really been a housing supply crisis. State lawmakers have responded in recent years by clearing local obstacles to housing construction, spurring taller, denser multifamily housing development in cities across California, Santa Cruz included.

Yet, almost all of these units are rentals, keeping many first-time homebuyers without options. According to the Terner Center for Housing Innovation, fewer than 40% of Californians between 35 and 45 own their homes, compared to about half 20 years ago. 

Condominiums — multifamily housing in which the individual units are for sale — have long offered a more reasonable path for the country’s middle-income earners to break into homeownership. In Santa Cruz, where home prices since 2019 have averaged between $1.2 and $1.8 million, the average condo has sold for half the price, sometimes less. 

The city is in the midst of a multifamily housing construction boom, permitting more than 850 units over the past decade, with many more to come. Yet, no new condos have come on the market. This is mostly true across the state: In California, only 3% of all multifamily homes built between 2011 and 2021 (the latest data available) were for-sale units. 

Developers, planners and housing experts say this is due, in part, to market conditions — buyers prefer single-family homes. However, they say a specific state rule, which makes condo development too risky, shoulders most of the blame, and has no clear sign of changing any time soon. 

Kathe Head, president of Keyser Marston Associates, the housing consultant firm that has worked with the City of Santa Cruz for decades, said condo development statewide has “really fallen off.” 

“And the explanation I’ve been getting is that it’s the defect liability law issue,” Head said.  

In theory, California’s construction defect liability law does much to protect the new condo purchaser against mistakes made by the developer. Dating back to the 1970s, the law allows buyers to sue for defects that range from structural issues in the foundation or framing, to more cosmetic problems, such as bubbling paint. 

According to a 2024 analysis by the Terner Center, the UC Berkeley group focused on finding policy solutions to the state’s housing crisis, the risk of litigation had already begun turning developers off from building condos by the 1990s. 

Then, in 2002, the legislature approved Senate Bill 800. Known as the Right to Repair Act, the bill clarified a homeowner’s right to receive damages for defective construction and extended the statute of limitations for defect lawsuits. Condo buyers would now have 10 years from the point of sale for a newly built condo unit — as compared to four years for rentals — to find issues and take the developer to court. This means that, today, someone who bought a brand new condo in 2016 can still sue the builder, and the line between construction defects and natural wear and tear can be blurry. 

Although SB 800 allowed for homeowners and sellers to quickly settle on the cost of the repair and avoid court, the Terner Center’s analysis argued that in these cases — commonly class-action suits — plaintiffs’ attorneys are often incentivized to take the long way, engaging in extended litigation and racking up fees. The frequency and potential expense of these lawsuits have scared away many of the companies that would insure the projects. Those that still offer insurance, according to the Terner Center, charge exorbitant rates that fewer builders can pay.  

Sibley Simon, a partner with local developer Workbench, said the defect law has created a cottage industry where law firms seeking to take condo developers to court have a long runway to do so. 

“I don’t like being scared of the liability thing but the reality is that construction companies have shut down because those lawsuits put them out of business,” Simon told Lookout. 

Precise condo construction numbers are not readily obtainable for the city of Santa Cruz; however, Planning Director Lee Butler pointed to two specific projects that have taken a different approach to dense ownership development. 

Swenson Builders’ 79-unit Nanda on Pacific project sits at 1547 Pacific Ave. across from the post office, and was completed in 2020. Developer Owen Lawlor’s under-construction Front Street project involves three seven-story buildings with 175 units along the San Lorenzo River. Both are designed as condo projects, where the units can be sold individually. However, Swenson is leasing its units as rentals, and Lawlor plans to do the same.

Butler said this is an increasingly popular path, and allows building owners to avoid the defect liability risk since only homeowners, as opposed to renters, can sue. The units are still subdivided as individual, ownership units, but they are each owned by the same entity — the developer. If the developer eventually chooses to sell the units as condos, it won’t run into Santa Cruz’s condo conversion law, which prohibits property owners from converting their rentals into condos unless the rental vacancy rate is above 5%. According to Butler, the vacancy rate in Santa Cruz almost never rises above 2% because demand is so high. 

Yet, despite the relatively low supply, condos are not a hot commodity on the housing market, said Jennifer Watson, a local agent with Christie’s International Real Estate Sereno. 

“Condos are good for first-time homebuyers, and we’re seeing demand from a lot of 50-ish, single women, and a little bit from seniors,” Watson told Lookout. “But the market has slowed down.” 

According to local real estate data, condo sales in the city most recently peaked in 2021, when 196 units exchanged hands. That number has steadily declined, to 89 in 2024. 

Watson attributed some of the slowdown to insurance costs, which are affecting every corner of the housing market but are often higher for owning a condo “because of density, people living closer together and the fire hazards” that come with it. 

Head, the president of Keyser Marston Associates, said even if state lawmakers changed the defect laws and made condos easier to build, she still doesn’t see Santa Cruz as an ideal market for ownership multifamily units. Dense apartment construction, she said, already brings in a lot of money for developers, making for little incentive to build condos. 

But buyer behavior might be the most important factor. 

“Homebuyer preferences exist on a continuum, and people want a home as close to a single-family house as they can,” Head said. For people who can buy in Santa Cruz, Head said owning a densely built apartment unit doesn’t have much appeal. “I don’t see condos in downtown Santa Cruz’s future.”

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