Argh, another article I was interviewed for but I didn’t make it in. Washington CEO, Will Seattle’s condo market continue to buck the national trend?
Fortunately this article is much more critical of the Seattle condo market than other articles have been. However, I am disappointed it didn’t dig deeper and talk about the struggling developments (Trio, Domaine) and the number of re-sales and rentals stacking up at developments like 2200 and soon to be Cosmo.
Perhaps more interesting is the number of multifamily housing proposals filling up Seattle’s pipeline. The total number of proposed low-rise, mid-rise and high-rise multifamily units, including condos and apartments, increased 24 percent, from 13,823 in February 2006 to 17,140 in February 2007, according to New Home Trends. Meanwhile, apartments are converting to condos at a rapid clip: from 430 apartments in 2004 to 1,551 in 2005 to 2,352 in 2006, according to Seattle Planning and Development Director Diane Sugimura.
Do all those numbers point to a coming condo glut? It’s hard to say. Some of the condo proposals now in the pipeline, for example, could be canceled because of rising construction costs, and that could help keep supply in check.
I’m beginning to track inventory any help with the numbers would be appreciated. Hopefully I can have it produce some graphs like the one in the article so we can keep up with the numbers in real time:
Popularity: 4% [?]
33 responses so far ↓
1 EconE // Mar 29, 2007 at 2:54 pm
Matt…starting to think like an economist I see.
with regards to construction costs…let’s not forget that a large portion of those costs are “materials”
Materials prices that I would think are significant would be those of Lumber, Copper and Steel.
here are some charts that show the prices for the materials over the last few years.
Copper:
http://tinyurl.com/22jekb
Lumber:
http://tinyurl.com/2hn6rp
Steel:
http://metals.about.com/gi/dynamic/offsite.htm?site=http://www.meps.co.uk/N.Amer%2520Index.htm
any questions?
2 Brian // Mar 29, 2007 at 3:09 pm
Materials are always up. Even gyp board.
How about larger project specific cost items like seismic (new or upgrades) or site work (shoring is soooo expensive and every project has it for underground parking)…
3 EconE // Mar 29, 2007 at 3:55 pm
Hey…Brian…I guess you didn’t click on my links.
Materials are always up?
I guess I place more value in my education than I do in gypsum.
What are the sources of HH income for you Brian? Would any of them happen to be RE biased?
I have no vested interest.
4 EconE // Mar 29, 2007 at 5:30 pm
Hey Brian…me again…thanks for the tip off. How could I have been so dumb not to look into concrete product companies. Funny how most statistics that the companies provide end at 2005. But I did have a pleasant couple hours researching a few companies.
RMIX and USG
should be fun to watch!
5 matthew // Mar 30, 2007 at 5:23 am
I have been wondering if Seattle can absorb the condo boom that it is undergoing. After seeing many condo markets crumble in various U.S. cities, I am wondering if Seattle didn’t get the memo. They are continuing to build full speed ahead, while the lending market tightens.
As subprime continues to collapse, Alt-A will be the next to go. Many people are going to be unable to get the financing to buy. I have a feeling we could become the next San Diego. The situation deserves to be monitored. I think I am going to continue to rent my condo and remain on the sidelines for now. There will be a lot of new construction being finished in the next year or two, and it will be interesting if it continues to move with the pace it has moved the last few years.
6 matthew // Mar 30, 2007 at 5:27 am
I have heard that the lumber industry is taking a huge hit do to the slowdown in the rest of the U.S. housing sector.
Interesting graphs EconE, just goes to show you that building costs have actually gotten cheaper over the last year, mostly due to the slowdown in the rest of the U.S.
7 Brian // Mar 30, 2007 at 6:41 am
I don’t have any HH income that is RE based.
In my experience with contractors, unions, etc they will either mark-up their materials from what they pay off the shelf OR raise their labor costs to offset any drops in market conditions.
I was merely implying that although standard building materials tend to move upward as a baseline (ok, lumber is down - how many buildings are wood frame in downtown Seattle?), there are higher cost line-items in construction. Especially in a seismic area and near the water. I forget what it works out to, but *generally* I think for every floor you go down in large projects you could go up six or seven for the same gross $ amount.
8 matthew // Mar 30, 2007 at 7:28 am
Brian,
Did you view any of those other graphs? Steel, Copper, and lumber have all been dropping the last few months.
9 chris // Mar 30, 2007 at 8:45 am
But labor is still sparse so bids have not been going down…yet.
10 matthew // Mar 30, 2007 at 8:49 am
Agreed. We’ll see how it plays out.
11 EconE // Mar 30, 2007 at 9:02 am
So Brian….what is your experience with builders? Paying off the shelf? Sounds pretty small peanuts. Do you really thing that those steel and concrete buildings are “paying off the shelf”? Does Vulcan shop at Home Depot or Lowes? Do you think that Paul Allen himself is making the supply runs? Any builder that is buying his stuff from HD or LOW isn’t a builder I want working for me.
Nice spin on the lumber not being part of downtown Seattle. Um…there are lots of wood frame buildings…it doesn’t just have to be in Downtown. Not to mention…you didn’t comment on my other charts…they are both down also…although they are in a bear trap right currently IMO.
Then…you didn’t catch on to my USG and RMIX comments…go look at a 10 year timeline of their stock…notice anything? Check out the insider trading at some of the RE based companies (I’m not telling who…do your own research if you want to know who to short sell as RE crashes.
Labor costs?…Gee…I’ll bet there are quite a few out of work hi-rise condo construction workers that would love to come from Florida and Vegas to bid the price of labor down also…but watch out…those guys are migratory so even though you can say that Seattle created one more high paying job…it’ll be a person who will move on when the job’s done…no condo buying for those workers…nope.
Supply…meet Demand.
would you care to have an intelligent conversation about this or should I just call it quits…this is too easy for me.
Oh…and BTW USG and RMIX are both down so far today…and December copper is @3% lower than June copper.
To say that construction costs always go up is as ludicrous as saying RE always goes up….do the math…use some logic man. You are either proving that you haven’t been on this earth very long, are lacking a good mentor or are just not very intelligent…but that’s ok…dumb money is needed for smart money to get rich.
12 Brian // Mar 30, 2007 at 9:03 am
matthew -
Agree on the materials being down the last few months. But let me ask - do we have innately higher construction costs here (esp. downtown) than you would in the midwest? Are trade laborers more expensive? Are projects and construction methodologies more complicated (i.e. expensive) as excavate and shore up for garages? Some of these things are the result of a building boom that drive construction costs (as a gross number - bids) up regardless of market conditions. Whereas in other areas where bubbles already popped the bids drop down because contractors go from having an excess of work to needing work badly.
You can’t read too much into material pricing trends. If those are down right now then contractors are simply going to make more money by buying low and building high.
13 Brian // Mar 30, 2007 at 9:07 am
E -
I think we agree, I just don’t see where material pricing affects Seattle at this exact moment in time except to line the pockets of contractors, though the gravy train as has been noted should soon be winding down.
Off the shelf to me means a GC buying from his wholesaler at the prices your graphs represent. HD or Lowes marks up off those prices too for retail profit.
As chris noted bids haven’t dropped as of yet. And we all emphasize YET.
14 Brian // Mar 30, 2007 at 9:09 am
E -
PS I was focusing on downtown because that is where the high rises are and also where the higher costs of construction are best illustrated. I know there is plenty of wood frame in Greater Seattle. Sorry for the confusion.
15 Brian // Mar 30, 2007 at 9:13 am
E -
PSS You seem pretty pissed off today. Is everything alright? The sun’s out. It’s Friday. Baseball starts next week. Chillllllllllll…
16 matthew // Mar 30, 2007 at 9:25 am
Is labor higher in Seattle than the midwest? I honestly don’t know. I really don’t know how that applies to increased cost in Seattle.
As long as labor has been relatively stable in Seattle, than it shouldn’t be driving the cost up. Last time I checked, they haven’t done much to secure the SW border and the flow of illegal aliens into the country. As long as cheap labor is coming from Mexico, I wouldn’t think that labor costs would be rising that much.
If you have data to show otherwise, I’d be happy to take a look.
17 matthew // Mar 30, 2007 at 9:27 am
BTW (side note),
I live in a wood condo building (Belltown). Don’t buy into a wood building, buy steel!!!!! BUY STEEL!
18 Matt Goyer // Mar 30, 2007 at 9:33 am
Only the high rises in the core downtown are not wood. Everything in surrounding neighborhoods like QA, Capitol Hill, etc are all wood frame. I talked to the Trace developer and he said they couldn’t get concrete to pencil out for mid-rise.
Granted I’m not an expert in this but it at least in Canada wood frame is exceedingly rare in all categories so I was surprised to come here and find so much of it.
As for labor costs, wouldn’t they be much higher here than in the mid-west because of the higher cost of living? Or do these laborers all commute an hour into the city each day?
19 matthew // Mar 30, 2007 at 9:38 am
I worked as a laborer in Seattle for a year. The company I worked for paid 8 bucks an hour if you didn’t speak english, and 10 bucks if you did. Yes, I commuted about an hour or more every day. There was no traffic because I was either up at 5 am or working swing-shift.
I’m sure there might be a slight labor premium in major metro areas, but I don’t think it seperates Seattle from Miami, San Diego, NYC, or other major condo markets.
20 Brian // Mar 30, 2007 at 9:38 am
Yeah I was just looking on ENR’s website, but their Seattle City Index is subscription only (http://tinyurl.com/28h3eo). Union wage indexes I THINK have to be filed with the city. If the project is big enough, you can be sure Local # whatever is working on it and not so many from the minority demographic mentioned.
21 EconE // Mar 30, 2007 at 9:39 am
Brian…
No…I’m not pissed at all…it’s even sunnier and warmer down here in L.A….Still in bed though…should probably get out there for some recreation.
sure does suck not having to work…every day is a Friday for me.
so…in retort to your “chilllllllll”
learnnnnnnnn. educate yourselfffffff. Lots of my friends are making GOBS of money down here on the RE crash. Coming to a neighborhood near you soon!
22 matthew // Mar 30, 2007 at 9:41 am
The problem with wood around here is water damage and mold. The building I am in has undergone major work multiple times do to water problems. This would not be a problem if the building was steel.
23 matthew // Mar 30, 2007 at 9:41 am
do = due
I’m sleep deprived, sorry.
24 matthew // Mar 30, 2007 at 9:44 am
Brian,
If Seattle has a requirement to fill major construction with union workers (which could very well be the case) you could be on to something. I wonder if that is the case in other cities as well. That being said, I do not think that construction cost increases have played nearly as much of a role in the inflation of prices in Seattle as has loose lending/decreased lending standards.
25 matthew // Mar 30, 2007 at 9:49 am
Not saying that unions don’t hire illegals.
26 Brian // Mar 30, 2007 at 9:52 am
I agree that they do hire illegals.
But without knowing the ins and outs of unions - if the whole point of a union is to go in and get work for union members, how can they justify an illegal taking a crew spot off the hands of a member?
Unless they pay the illegal min wage, charge full cost, and give the difference to union guy x who is sitting at home watching Bassmasters.
27 matthew // Mar 30, 2007 at 11:04 am
What if the union member is an illegal?
28 Brian // Mar 30, 2007 at 11:49 am
Then I wouldn’t be shocked per se, but probably surprised…
29 chris // Mar 30, 2007 at 12:41 pm
“That being said, I do not think that construction cost increases have played nearly as much of a role in the inflation of prices in Seattle as has loose lending/decreased lending standards”
I disagree. the inability to deliver new product (replacement cost) below that of existing product has bolster prices- most particularly for condos. If construction prices had not risen 10% per annum for two years+ we’d have a lot more affordable high rise condos on the market.
30 EconE // Mar 30, 2007 at 4:01 pm
EEEEEEEconomics EEEEEEEEconomics
eeeconomics eeeconomics
FUN DA MEN TAAAAALLLLLLLS!
happy Friday everyone ;o)
31 matthew // Mar 30, 2007 at 5:25 pm
Chris,
So if supplies are getting cheaper, and labor is flat, then prices should be dropping right?
32 PhilW // Mar 30, 2007 at 6:15 pm
Land is the biggest single expense for building. The first thing that drops when housing falls off the cliff (coming soon to a town near you) are land prices as almost everybody liquidates their holdings.
Most of the condo projects that have started will be built, even if they have to switch them to apartments to keep the funding.
33 Chris // Apr 1, 2007 at 1:29 pm
Matthew, yes, new construction costs should be declining some but we’ve yet to see it in the bids at this point.
Land is extremely sensitive to demand. Land values tripled in Ballard in the last five years and land in say, Detroit, is virtually worthless when there is no demand for new product. That said, for most res. condo development, land is “only” 40-50k of total cost - or 1/4 to 1/5th. Its much higher (40%+) for townhouse projects.
Condo projects can switch to rentals, but many will not because even the highest rents that could be underwritten will produce much less value than what condo might have supported in good times. ie - $2.30/sf rents @700 sf = $19320 gross income less 30% expenses = $12,600 NOI (assume no vacancy) = value of $245k @5.5% cap rate. Dividing this value by the 799 sf unit size yields $351/NRSF in value vs. $500-$600/sf in value for a condo. However, apartment projects can sometimes be more financeable because banks will ok projects with minimal margin on cost providing that the project adequate debt coverage whereas condos would need a 15-20% margin.
Leave a Comment