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Year of the condo?

By February 11, 2007


Seattle Times declares this year, The year of the condo in downtown Seattle!

Some of the more notable quotes from the article:

  • Thyer insists that Seattle isn’t like other cities, where developers are struggling with an oversupply of new condos. There’s a demand for condos in downtown Seattle, he says, drawing a contrast with the speculative buying frenzy that has led to a boom-bust scenario elsewhere in the country.
  • More than a dozen residential projects are in some stage of planning. They would add more than 3,000 units downtown if all were built, according to the city’s planning department.
  • Leslie Williams, the president of a local condo-marketing firm, says some developers who had intended to build condos are considering apartments instead. They like the economics of apartments as vacancy rates decline and rents rise.
  • Since 2004, five condominiums totaling about 700 units have been completed in downtown Seattle, an area that includes the retail district, Denny Triangle and Belltown. Those numbers are nearly certain to double and triple by the end of 2009.
  • Twelve condo projects for about 2,100 units are under construction, and several more are expected to start construction this year. Thyer’s development, Olive 8, is scheduled to be completed in fall 2008.
  • Jones estimates that speculators accounted for 30 percent or more of all new condo purchases in Miami and Las Vegas, compared with “no more than 15 percent” in Seattle. Now, developers require buyers to disclose if they intend to live in their new condos in an effort to limit speculators, Jones said.
  • Ten of the 12 condos under construction have sold about 1,200 of the 1,700 units to be built, according to a Jan. 28 report by Seattle real-estate agent Brett Frosaker.
  • “The sweet spot of the market is always the low end. The question is, what’s the low end?” Williams said. “Five years ago, we would have said it’s under $300,000. Now it’s under $1 million. Pretty scary.”

A few thoughts…

I think the inventory numbers might be deceiving because they don’t include conversion and town home inventory. Both categories compete with the condo inventory.

I think that there are more flippers and speculators than the article would like us to believe. Just because you didn’t check off the investor check box doesn’t mean you cannot not occupy your unit and flip it. I would suspect our speculator rate is close to 20%.

I think the author of the article should have dug into Leslie’s comments about the economics favoring apartments over new construction. Just last summer we saw a huge number of quick conversion projects because the economics favored condos over apartments. What’s changed so quickly? Are the developers afraid of a bubble or is something else at play here?

I think we need an article that looks at the demand side of the equation instead of focusing on supply. Just who are these people who can afford $600+/square foot? Are there really that many suburbanities moving downtown? Is there a big influx of hires coming into Google/Amazon/Microsoft? At what point do they get priced out of the market?

Realtor Ben Kakimoto also attended the mentioned Downtown Economic Forum and blogged about it 2007 State of Downtown:

Currently, over 32 condominium projects have been proposed providing 9,000+ new housing units to the downtown area in the next few years. Though, Matthew Gardner, a real estate analyst & economist, expects that only 60% of the proposed projects will be built, a lower estimate than he provided at the Downtown Realtor Symposium this past June.

When asked if there will be an over supply of high-end condos, Gardner didn’t believe so stating that developers have been more cautious compared to other markets and that downtown will likely actualize approximately 5,400 units over the next 4 years. He did mention, however, that the realization of smaller units with higher prices may keep suburbanites away. I’m not an economist, but intuitively, it does seem a reach to believe the buyer pool is large enough to support 1000’s of condos where 1-bedrooms start at $500,000 and 2-bedrooms start at $800,000.

I definitely agree with Ben’s comment. I too am skeptical there is a sustainable market for one bedrooms at $500k+. We’ve heard a number of times that the rising cost is due to the increasing cost of construction. I’d love to see someone dig into this more and look at construction costs over the last ten years and the prediction for the next ten. What are the factors at play causing construction costs to rise so rapidly? What might cause them to fall?

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