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Condo Expo: Matthew Gardner on Seattle area economics and forecast

By May 20, 2007

Here are my notes from Matthew Gardner’s of Gardner-Johnson talk on Seattle area economics and real estate market forecast.

He started with a brief photo history of condos in Seattle. Things got started in 1982. In 1990 One Pacific Tower was built. Average unit size was 1,200 square feet. There were 4000 units in the pipeline. 1998 Concord building. Other notables: Meridian. Cristalla first building over $500/square foot. South Lake Union. Today there is more inventory and more choice.

Who is living in Seattle?

  • Retirees are staying in Seattle
  • Young urban workers: over 80% of households are non-family households
  • Few investors

Why are people moving downtown?

  • Retirement: Downtown living is more appealing than the suburbs
  • Traffic: People want relief from increasing traffic congestion
  • Capital improvements
  • Lifestyle

On conversions

Conversions have been popular in the last 6-7 years because apartments have been under performing. He thinks conversions will slow down because of the push for increased legislation to protect renters.

# of units in the pipeline

2005: 400
2006: Just Hotel 1000
2007: 1,000
2008: 1,800
2009: 1,800
2010: 3,250

Compare this to Miami which is projecting 30,000 units in 2008 or San Diego with San Diego 6,500.

Or Vegas which ahas 95,000 permits in the pipeline of which 15,000 to be built in the next year.

On bubble talk

Quite simply that bad press sales papers. He doesn’t think there is a bubble in Seattle.

Average project size

2005: 140 units, 3 buildings
2006: 45, 1
2007: 160, 6
2008: 160, 9
2009: 160, 10
2010: 300, 11

But yes, Seattle does have affordability issues.

On immigration. Seattle is continually growing. Only 1992 had more people leaving then coming in even though there were recessions in between.

Average unit price point

2005: below $500k
2006: $1.3 million (just Hotel 1000)
2007: $500k
2008: $800k
2009: $800k
2010: sub $700k

In the short term average price increase but long term will decline.

Average price per square foot

2005: $480/sqft
2006: $800
2007: $580
2008: $700
2009: $800
2010: ?

Sales velocity

He flipped through this slide too quickly for me..

How is inventory in the pipeline selling?

2007: 70% reserved
2008: 50% reserved
2009: 9% reserved

The market is showing “remarkable resiliency” to too much inventory.

But what about the flippers? There have been projects in Vancouver and Miami that were sometimes 80% to 100% sold to flippers. Contrast this to 30-40% flippers at 2200. But it is important to create stability and developers are making changes to limit the amount of investors.

Emerging trends

  • Life style differentiation echo boom gen y
  • Urban / suburban mixed use: I.e. Renton, Auburn, Lynnwood
  • Transit oriented development
  • Not just downtown
  • South Lake Union will become the densest neighborhood. Belltown is tapped out because there is less developable space.

Are we oversupplied?

“Not in any way shape or form”. We’re limiting speculators to 10-15% which results in less competing product when the building finishes.

  • Limited supply vis-a-vis economic and demographic fundamentals
  • Great job growth that will slow middle of next year. 30,000 new new jobs/year
  • Retirees stay here and don’t go south
  • 3,500 scheduled deliveries in 2010 are not all going to happen some will be apartments instead

Are we overpriced?

“It certainly is expensive”

  • Cannot correlate between new construction and resale
  • We did not go up as fast as other regions and therefore won’t go down as fast
  • Haven’t gone down since early 80’s. single digit is attainable
  • Capital markets want to be in Seattle

What to expect?

  • Transfer of wealth to kids. This will stop in 10-12 years. Retirees are living longer
  • Interest rates will remain benign. They will be steady this year and won’t go anywhere in an election year. Money is still relatively cheap.
  • Not following the path of other condo markets
  • Slowing velocity function of choice in the market

What else?

Downtown will head north to SLU.

Housing sales will remain buoyant but still no families. a lot needs to change for families to come to downtown.

Financing will continue to tighten. 7% in Seattle is sub0prime. 7% of that is in default. This is a small amount.

Developments will continue to limit investors.

67,000 millionaire households in king county.

“If the market wasn’t good I’d tell you. Seattle is growing up.”

We dont’ have a site like in Miami which let’s people re-sell their presales before closing.

Absolute price will be coming down, but size of units will be getting smaller.

3 bedrooms declining.

Large dining rooms declining

Everything has its place in a condo.

There will be increased demand for micro sizes. Witness Moda selling out immediately.

Traditional wide open studios giving way to open one bedrooms.

Built Green and LEED is a huge thing but expensive to do. Will the developer get their $40/square foot premium back? We can’t answer this today because we need more data show where the value is for green developments.

40% increase in construction costs due to increase cost of steel and concrete and a tight labour market.

HOA dues are reaching their peak at 0.60 square foot.

Gyms are on the out, developers would rather sell that square footage. But we will still see full amenity buildings.

Affordability incentive zoning south of downtown.