http://seattlepi.nwsource.com/local/336370_downtown22.html

Last updated October 21, 2007 11:07 p.m. PT
Will condo wave swamp the market?
Lenders are pulling back, but builders say buyers are out there
By AUBREY COHEN
P-I REPORTER

Suzy and Clay Smith looked seriously at downtown Seattle condominiums for about five years. Two weeks ago, they decided to buy in the Olive 8 building, under construction at Eighth Avenue and Olive Way.

Nationwide real estate turmoil didn't make them hesitate, Suzy Smith said Thursday. "Frankly, what gave me second thoughts was the fact that there are so many new buildings going up."

The national real estate hangover spooked some Seattle buyers and the national lenders who fund condo projects, leading developers to shelve building plans. Others, however, insist the Seattle market will hold up.

For example 83 percent of the more than 1,200 new downtown condo units that came on line in 2007 sold. All of the more than 1,400 downtown units built from 2000 through 2006 have sold, according to market research firm Realogics.

http://seattlepi.nwsource.com/dayart/20071022/Downtown-Growth-1022.gif

And the amount of building pales in comparison with cities like Miami, which had 60,000 condos in the development process at the peak of its boom and where people bought condos site-unseen with no intention of living in them, said Bryon Ziegler, developer representative for Williams Marketing, a Seattle company that works with developers. "We never even remotely had that kind of market in this area," he said. "We've got real jobs here supporting our growth."

But there was some evidence of a speculative frenzy in downtown Seattle in the past year, when investors in the newly completed 2200 Westlake and Cosmopolitan condo projects bought about one-third of the units in those two buildings, then immediately put them up for sale, said Dean Jones, president and chief executive of Realogics, another Seattle condo marketing firm.

Developers learned from those projects and other cities, however, and now cap investor purchases at 10 percent or less of units in new buildings, he said, adding that some are enforcing those limits with stipulations that buyers who sell their condos without living in them for at least a year must forfeit all or part of their profits.

Still, because of the national fallout, lenders are requiring developers who previously put up no more than a quarter of a project's funding to post as much as 40 percent and sell up to half the units before finalizing financing, Jones said. "We haven't seen presale requirements for a while."

Those changes add to project costs, leading some developers to build apartments instead, or to put plans on hold until market appreciation supports them, said Jones and Matthew Gardner, a Seattle land-use economist who works with developers.

Half of the approximately 1,600 condos Gardner expected to hit the market in 2010 still are looking for financing. Scaling back projects actually would lower the risk of overbuilding and help prevent Seattle from becoming the next Miami, he said.

The decrease in potential competition is one reason why downtown's high-end ESCALA building will increase prices 5 percent as of Dec. 1, said John Midby, a principal of developer LEXAS Cos. Midby cited a 40 percent increase in construction costs in the past 18 months, a relative lack of places to build in-city condos and Seattle's strong economy.

"You, in Seattle right now, probably have more dynamic corporate activity than any other place in the United States," Midby said.

With completion nearly two years away, ESCALA has sold about one quarter of its 274 units. The project limits investors to 5 percent of the units.

But since most of the buildings in the recent downtown condo boom aren't completed yet, it's difficult to bear out predictions about how many people will live in them.

Hard population counts come only every 10 years with the census, but the state Office of Financial Management estimates the population of downtown Seattle -- the commercial core, South Lake Union, Belltown, the Denny Triangle and Pioneer Square -- grew by 31 percent from 2000 through April 1, 2006. Provisional 2007 state estimates released last week boost growth to 37 percent, with a total of nearly 30,000 people now living downtown.

The Puget Sound Regional Council estimates more conservatively, saying downtown grew by 21 percent from 2000 through 2006. Either way, the growth dwarfs that of the city as a whole, where population grew by 2.7 percent through 2006, according to the Puget Sound Regional Council, or 4.1 percent through April 1, 2007, according to the Office of Financial Management.

The numbers largely reflect the condos developers built early in the decade, rather than those under development now.

In the past few years, developers moved to building projects that focus on particular niches. Belltown's Moda building, for instance, focuses entirely on the more-affordable end, selling studios as small as 296 square feet for less than $150,000, while the Four Seasons Private Residences, on First Avenue by Pike Place Market, has raised Seattle's upper limit with prices that start at $2 million.

Observers such as Brett Frosaker say the condo market has changed in recent months, as buyers have gained choices and savvy.

"A year or two ago, folks were easily wooed by the idea of being 'the first' (to reserve units)," said Frosaker, who is broker/owner of condo sales and marketing company Columbia Real Estate Group and runs the Web site CondoCompare.com.

"Now, with an ever-growing supply in the market, buyers are able to wait," he said, adding that condo-focused blogs are making it easier to compare projects and learn about the sales process.

The downtown condo market recently has resembled a back-and-forth Rocky fight, Frosaker said, with a great March giving way to a May with as many cancellations as sales, then a slow summer and a September rebound as some developers lowered prices or offered incentives, and buyers realized "the mortgage meltdown was not the apocalypse."

For now, people who are buying downtown appear to be basing their decisions more on personal circumstances than the state of the market.

The Smiths, who live in Coupeville, want a place to stay when they come in for Suzy Smith's regular cancer treatments and, longer term, just for visits to the city. They bought now because they found the building they liked and just sold another property.

Dan Grossman, who just bought a condo in downtown's Newmark Tower, said he started looking seriously in August but did not plan to buy so soon.

"I had originally planned to wait longer (into 2008) to buy, hoping that the downturn in the national real estate market would finally reach Seattle and bring down prices," he said via e-mail.

But then, he said, he found the "perfect place" and put in an offer on its second day on the market.

As for waiting for a downturn, Grossman said, "that may never happen."

http://seattlepi.nwsource.com/dayart/20071022/450DOWNTOWN_05_RS.jpg
Investors bought about a third of the units in the 2200 Westlake, shown, and Cosmopolitan condo projects, then put them up for sale. To head off a speculative frenzy, downtown developers now put a cap on investor purchases.

Interesting read. I do wonder about some of the numbers. For example, I would guess that Olive8 is still being counted as a 2008 building since there are probably 200 of 240 or whatever units sold for that building.

Too bad they don't provide a breakdown of the buildings and what has sold. Would be pretty interested in that actually.

Overall though, I am not too worried about the downtown market. It does look like a large increase in units on paper, but I think that the demand will mostly be there, at least for the quality projects. Perhaps some of the real high end stuff will have problems, but otherwise I think as downtown becomes more densely populated you will have whole waves of people considering downtown living where they haven't before. The better downtown gets, the more people will want to live there. And those 2008 buildings are still pioneers in many ways I think.

Well if we're supposed to get 1 million new residents here by 2030, that's about 50k per year, roughly. So we're gonna need, what, 15k to 20k new units each year to accomodate that? Plus there seems to be an ongoing demand for pied-a-terres which is downtown specifically.

That being said there sure are a lot of proposals and so many of them are 'ultra high market'...

If 4,000 Downtown condos opened in the same year, that would be an "overwhelmed" year. But we're talking 4,000 in a three-year period. That's not a massive number. Particularly when we're a metro of 3.8 million and a substantial chunk of the whole metro would consider moving Downtown.

People see a lot of cranes, but much of that is rentals, low-income housing, senior housing, and even offices and hotels.

Condo construction will follow condo demand (and forecasts thereof), which in turn are related to the overall housing market. Single family houses are still significantly more expensive (per square foot) than Condos in the Seattle area. Also, macro dynamics such as "dual income, no kids" and "empty nesters" continue to drive demand as they seek a more cosmopolitan lifestyle.

Overall, there will likely be a slowdown in Condo sales that follow the slowdown in the overall economy, but my guess is that they will be brisk enough for investors to build new projects since they anticipate future demand not current market conditions.

I get tired of Stories in the papers crying wolf. Seattle is just catching up to where they should be. This is not L.A. or Miami.

Condo construction will follow condo demand (and forecasts thereof), which in turn are related to the overall housing market. Single family houses are still significantly more expensive (per square foot) than Condos in the Seattle area. Also, macro dynamics such as "dual income, no kids" and "empty nesters" continue to drive demand as they seek a more cosmopolitan lifestyle.

Overall, there will likely be a slowdown in Condo sales that follow the slowdown in the overall economy, but my guess is that they will be brisk enough for investors to build new projects since they anticipate future demand not current market conditions.

Good thoughts, but, inside Seattle at least, condos go for way more than houses per square foot.

Single family houses are still significantly more expensive (per square foot) than Condos in the Seattle area.

hmmm. More like half as expensive psf. This has an affect on seattle. If Sf prices stagnate or decline somewhat, condos become relatively more expensive. this could reduce demand for condo ownership to some extent

Especially at the high end it seems. The Four Seasons' $2000 per sq foot translates into $4 million for 2000 sq. ft. There aren't too many, if any, single family homes in Seattle that approach that.

hmmm. More like half as expensive psf. This has an affect on seattle. If Sf prices stagnate or decline somewhat, condos become relatively more expensive. this could reduce demand for condo ownership to some extent
New construction condos appear to be breaching the $600/sq foot sales price on average. Not too many 2000 sq ft SFRs being built for $1.2MM in Seattle. Please note: IN SEATTLE!!

I believe all unit types are more pre square foot in Seattle, assuming you make an equal comparison -- like Seattle vs. the whole Eastside rather than just Hunts Point for example. The Times had an article once where units of all types were compared by neighborhood, and most of the top $/sf neighborhoods were within Seattle.

Not every buyer would purchase the condo right away before it get built. Some buyers prefer to wait until these condo buildings completed so they can give the close look before they purchase it. I'm currently looking for a condo to purchase but I'm very picky about the location, exterior/interior, quality, floor plan, and costs. Sometime it is frustrating when some salespeople are very not informed compared to AVA sales people and can't meet my preferences. I have to continue looking around and hope to find the right one to purchase.

^ I agree on that. It's hardly any different then a car purchase and the dealer knows less about the car then you do. 'Does this have side air bags?' 'Uh, umm, I think so...'.

Generally, and probably even now, you get a better deal buying in advance.

Even if you think values might stagnate or fall, the odds are good that over, say, 24 months values will rise. I wouldn't be surprised by growth in the 5% range, or even 8-9%, over that period.

Personally, I like to 'kick the tires' and can't imagine purchasing pre-construction. I want to get out my measuring tape and make sure I'm getting what I need. At the same time, when you buy as a resale, you pay what the market will bear. Hate to think I overpaid just like all of my new neighbors.

Looks like that is what happened to 2200. I know, I know. Lot's of them were purchased as NOO but still. It appears the sales price is not the current market price.

What happened with 2200??

Too many purchased merely for investment intending to sell their unit upon construction completion (or so it appears). Obviously the HOA did not have a limitation on owner occupancy that coincides with most lender requirements. Either that, or those purchasing their units indicated that they WERE going to be owner occupied, but never moved in. As a lender, I noticed several requests to either refinance or for these to be sold. The units and their comparable sales in the building had NEVER BEEN MOVED INTO.

Most conforming lenders require an owner occupancy ratio in the building of 80-90%. Most are now going to 90% given the glut of investment purchasing in recent years. Non-owner occupied condos reduce a neighboring units value. 2200 is WELL beyond that if you consider a vacant unit to be an investment property. They're really nice units, but at this point appear to be over priced.

For example, right now there is a 1680 square foot unit listed at $1.6MM (3 others in the project also listed for $1MM+). Never been lived in! There are others that appear to be occupied, but right now there appear to be over 25 units listed right now!!! That's an awful lot for a project this size. And who nows how long each has been on the market.

This project is really nice, but could be deemed a failure as an investment for those looking for a quick turn around investment. A know there are a number of people who participate in this thread that intend to do a similar move on upcoming projects live Olive 8, Mosler, or other soon to be completed condos. Just a word of warning that this does not always work.