By Jack Stubbs
Over the past several years, condo development in Seattle has been relatively stagnant, with many developers—and potential tenants—having opted for apartments instead. However, it could be that things are about to change. Experts in the condo development market hold different views about whether the trends that characterized this cycle are indicative of what lies ahead for the condo market.
In a 2017 Q3 report by Polaris Pacific, a couple key statistics stand out that reflect the current dearth of condo development in Seattle. The current median resale price for condos is $545,000. In 2016, there were 4,743 multifamily units completed, with only 583 of those developed as condos. Conversely, the San Francisco condo market, the median resale price is $1,115,000, more than double that of Seattle.
When asked to contextualize these figures, however, two researchers from Polaris Pacific Pacific emphasized that, in spite of these statistics, there is potential for further growth in the next cycle. Miles Garber, vice president of research in Polaris’ San Francisco office, said that “Over the last couple of years, Seattle has experienced very modest price growth…there’s some interest in doing condos at sites that were initially planned for apartments…the understanding is that there’s further room for the Seattle market to grow,” he said. According to Josh Nasvik, project director at Polaris’ Seattle office, demand for condos in Seattle will remain, regardless of timing. “I think the demand for condos in Seattle is there, regardless of where we are in the cycle,” he said.
Nasvik believes that, with Seattle experiencing extensive in-migrations from residents coming from more expensive markets in the U.S. such as the Bay Area and New York City, many of them—especially Millennials—might opt for condos in the long-term rather than apartments. “A lot Millennials who moved to Seattle from other markets who may have initially rented a home have firmly settled in Seattle and are looking to plant more permanent roots by owning, instead of renting, their home,” he said.
On the other side of the equation, however, people coming into Seattle might be taking more of a short-term view, according to Erik Mehr, owner of brokerage firm Mehr and Associates, and leader of development and sales team for the Gridiron condo project. Gridiron is a 107-unit project located in the heart of Seattle’s Pioneer Square neighborhood. “Many people are moving here for the short-term. [Many companies] hire people for two-year contracts. A lot of the Millennials that are coming here make great incomes, but [don’t necessarily] want to buy a condo if they could just rent an apartment for two years,” Mehr said.
One of the key figures used to analyze condo development is the months of remaining inventory (MRI), which indicates how many months it would take for the current supply of available condos to be absorbed. As the report indicates, the MRI has decreased from 3.5 in 2014 to 1 in August 2017, a trajectory that is indicative of a seller’s market.
Looking ahead at future supply and demand for condos versus apartments by district, the figures demonstrate that apartments have been much preferred in this cycle. There are currently 795 new condos under construction in Seattle (481 of these downtown), with an additional 614 condos (including 287 in Capitol Hill and 130 downtown) that are entitled and could begin construction in the near future. Conversely, there are 7,027 apartment units currently under construction (including 2,976 downtown, 969 in Capitol Hill and 639 in Lake Union), with an additional 5,336 units approved for construction, according to the Polaris report.
There are various factors that might currently be contributing to the lack of condo development in Seattle, according to Mehr. Apartment prices are currently so high in Seattle that there is little reason to build a condo, according to Mehr. “Developers can build an apartment building and sell it for basically the same price that they could sell it as a condominium,” he said.
Furthermore, condos represent a much riskier investment from a financial perspective. “It’s much easier to get financing to build an apartment than it is to build a condo, because it’s a riskier product…if the market shifts and prices fall, you’ll have a construction loan of X dollars and banks are going to lose money…condos are inherently more risky for a bank to give a construction loan for development,” Mehr added. In the Eastside condo market, Bellevue has been experiencing similar trends, according to Bemi Jauhal, director of sales and marketing for Bosa Development. Bosa is developing the One88 Condos project, a 21-story 143-unit high-rise scheduled for completion in 2019. “Construction costs have increased over the years, and it is also more challenging to get condominium financing compared to 10 years ago,” Bemi said.
Mehr also believes that there are other factors that might make condo development not worth the risk in the long run, due to state laws and legislation regarding condo development. “There’s little reason to build a condo when I might only make 10-15 percent more and suffer all the potential consequences like insurance issues, higher litigation risk, and all the sales commissions,” he said.
Since 2000, there has been a general preference for apartments over condos. Indeed, since a peak year in 2007—when 1,674 new condos were delivered to the market—there have been a significantly larger number of apartments built than condos, according to the Polaris report, with only 583 condo units delivered in 2016.
However, in spite of the relative lack of condo development recently, conditions for condo development might be becoming more favorable, according to Nasvik, with several condo projects in particular catching the eye. “In the last year, Seattle experienced double-digit growth in condo prices. At the same, three new condo projects—Nexus, Insignia and Luma—have been extremely successful from both a per square foot and absorption standpoint,” he said. Nexus is a 40-story, 374-unit project located in the Denny Triangle submarket in downtown Seattle. The project has an average monthly absorption of 19 units, with unit prices ranging from $688 per square foot for a studio to $1,146 per square foot for a three-bedroom unit. Insignia is the newest luxury condo development in Seattle—comprised of 203 one-bedroom units, 502 two-bedroom units and two three bedroom-units—located at the intersection of South Lake Union, Downtown and Belltown. The Luma development is located between First Hill and Capitol Hill, comprised of 168 units, with prices ranging from $527 per square foot to $903 per square foot.
In spite of the relatively few number of condo developments in 2016, current projects underway suggest that future condo construction might become more prevalent, according to Nasvik. “The gains in the condo market, coupled with an increased apartment supply, is making Seattle an attractive place to build new condos—despite Washington’s onerous construction defect laws,” he said.
Mehr of Gridiron condos also believes that, from a financial perspective, a tipping point will occur. “Condo prices in Seattle will get to a point where there’s a big enough margin between what the apartments are selling for and what the condos are selling for, that it’ll become worth it to take the risk [on developing a condo]. Right now, there isn’t enough margin difference between condo and apartment prices,” he said.
Looking ahead, pricing of condos will be crucial factors in the Seattle area. “As companies like Amazon show no signs of slowing down, condo prices in Seattle will continue to increase,” Nasvik said. According to Jauhal of Bosa Development, low condo inventory and high demand will encourage further development of condo projects, especially in Downtown Bellevue.
While geographical location and other factors play into the equation, the tipping point for condos will ultimately come down to the numbers, regardless of the risks involved in condo development, according to Mehr. “State legislation and the associated risk with condos isn’t going to change…but the margins will become sufficient enough where sheer pricing and profitability will encourage developers to incur more risk,” he said.