By Meghan Hall
Seattle’s economic renaissance has prompted an unprecedented wave of development throughout the region, which has primarily manifested itself in the form of mixed-use apartment developments. While apartments have been built in large numbers, however, there has been a complete dearth in condominium construction across the city. Few condominium projects have been proposed or built over the past several years, creating a severe demand imbalance and prompting city and state officials to turn their eyes towards measures that
could catalyze the creation of for-sale housing.
According to Marco Lowe, the Government Affairs Director for the Master Builders Association for King and Snohomish Counties (MBAKS), there are a myriad of reasons why apartment creation has dominated the market over the course of the last cycle, including profitability.
“Traditionally apartments were less interesting to builders than condominiums, because when you sold the property it wasn’t ongoing ownership to the builder,” explained Lowe. “As we experienced rapid job growth in Puget Sound, apartments were attractive to many builders, because if you didn’t want to own them long term there were many people interested in buying them once they were leased up.”
There were more than 28,251 apartment units under construction and 3,636 apartments came online during the third quarter of 2018, based on a Kidder Mathews’ Seattle Multifamily Report. The largest completion was Kiara, located at 111 Terry Ave. N., located in South Lake Union with 461 units that opened in September 2018. On the Eastside, outside of the Seattle urban core, more than 60,000 new apartments have been built since the market cycle began in 2012, real estate analytics firm Marcus and Millichap estimates in its 2018 Fourth Quarter multifamily report. The surge in inventory has meant that rent growth has slowed and so has the profitability of apartment complexes as the current cycle has progressed.
“Now that we’ve seen such an amazing production of apartments over the last three years, apartments aren’t as attractive to buyers because rents have plateaued,” said Lowe. “For many reasons that is a good thing; we couldn’t see rents go up forever, but there is still an interest in entry level housing.”
As the market continues to mature, condominiums have become more profitable, but a gap in the market still exists. Why? According to Lowe, the current of supply is in large part due to current legislation — such as the Washington Condominium Act — which places the burden of liability on builders in an effort to protect consumers participating in the presale of a condo.
Throughout the last market cycle, legal action against condominium developers became a frequent occurrence. The act was created in 1989 in response to a slew of projects that failed to properly create safe residences, and the high cost of insuring such projects meant lower returns. For many, said Lowe, the risk inherent in the construction of a condominium development was not worth it, especially at a time when apartment complexes were becoming profitable. In some cases, some condominium builders were sued for things such as nail patterns, even if the building was structurally sound.
“The vast majority of condo [developers] were actually sued,” said Lowe. “But coming out of the recession, people didn’t want to re-enter the market, because apartments were fairly successful. In this last cycle many condominiums would have been built if the insurance companies and developers felt like a sound product would not have been sued. And I don’t think either party felt that way.”
Lowe said that MBAKS is advocating for condo liability reform to allow affordable condominium developments to return to the market. MBAKS hopes to modify the legislation to better define what constitutes a construction defect and grounds for litigation, while also providing protections for Homeowners Associations who decline to sue a builder should defects arise later. MBAKS also hopes updated legislation will require parties to notify builders of defects before initiating litigation.
“We want to make it clear that deviation from county code is not grounds for a lawsuit in and of itself, and that the building needs to show damage,” said Lowe. “Sometimes a deviation alone was enough to justify a large settlement, whether the building was sound or not.”
“When there is physical damage or safety risk, the consumer has every right for recourse,” Lowe added.
Lowe and MBAKS are hopeful that updated legislation will be passed in 2019, although Lowe admitted it will take time before developers and insurers will be willing to tackle the market again.
“Insurance companies and developers will need to feel secure, and they may want to let the law go a year or two before they feel like they have an environment in which they will build and insure again,” said Lowe.
Still, Lowe hopes that reform will bring more affordable condominiums to help relieve demand and offer another housing option for consumers.
“Condos for many people in home ownership are the first rung on the ladder and the last rung,” said Lowe. “Condos in particular in cities like Seattle that are fairly built out, can give an option for homebuyers that can be affordable.”
