Inflection Point: Downtown Seattle Condominium Demand Ticks Up
Seattle remains the fastest-growing large city in the US with enviable market fundamentals and a downtown population that grew by 89 percent since 2010. So, what is this so-called “market pause” that brokers have described over the trailing 12-months, and where are we headed? Market watchers offer their perspectives and forecast a sales surge this fall.
“Looking back, many consumers had analysis paralysis with the variable media reports and so they adopted a wait-and-see attitude to monitor the evolving market conditions,” said Dean Jones, President and CEO of Realogics Sotheby’s International Realty (RSIR). “With rising resale supply and new construction offerings, there was less urgency, and the headlines, in part, helped create a self-fulfilling prophecy about a slowing market. The market trajectory has since turned more positive—both pending and closed sales have grown each month in 2019 and both are now trending higher year-over-year. I think we’re witnessing an inflection point, and sales are rebounding.”
According to NWMLS data, not only are resale volumes increasing by 39% but condominium values may be recovering too, reversing an otherwise persistent downward trend over the past year. In July 2019 median home prices closed out at $617,500 with an average price per sq. ft. of $801 compared with the same period in 2018 when median values were $650,000 and averaged $799 per sq. ft., suggesting that average values are effectively flat year-over-year and noting a higher volume of closings at lower price points. There have also been seven sales in July ranging from $1,050,000 to $9,200,000, and another nine that went pending this month priced between $1,029,000 and $9,495,000 (and likely to close in August). Many of these listings found buyers after months or years on the market while others sold within days, a signal that more consumers are stepping up. RSIR has been involved in eight of these transactions and affirms an uptick in consumer activity.
The market is setting up for a healthy recovery, Jones believes, because many of the headwinds presented over the past year are largely resolved or reversed course completely.
“We observed several years of double-digit median home price increases, effervescent media stories and multiple offers on homes well into the first quarter in 2018, then the market began to shift,” said Jones. “Pending sales (and closings) dropped, inventory spiked, and the headlines turned south. Clouds were forming around Amazon’s plans for HQ2, interest rates were rising, and by late 2018 the stock market was correcting. Amazon share prices alone dropped by a third and so did the demand for homeownership with 45,000 local employees affected. Fast forward to today and the market is rebooting.”
What a difference a year makes—interest rates have recently dropped to a two-year low, the stock market is booming along at all-time highs, which increases consumer confidence and adds liquidity for prospective homebuyers. As for Amazon, their feared exodus with HQ2 is more like HQ1.5, given that much of their expansion is taking place on the Eastside vs. the East Coast (the company will add sustained employment growth on both sides of Lake Washington). Besides, other tech titans, such as Facebook, Google, Apple, and Expedia, are each in the process of occupying new and planned campuses in the South Lake Union and Interbay submarkets by 2020 and are bringing with them tens of thousands of jobs bolstering housing demand. The markets also seem less affected by political shenanigans while the Seattle City Council elections in November 2019 renew optimism about downtown Seattle’s competitive position.
“Robust job growth continues to drive housing demand—both for rent and for sale, while traffic woes encourage urbanization—consumers want to live closer to job centers,” said Matt Van Damm, Vice President of New Developments for RSIR. “More than 1,000 people a week are moving to the area and while most new residents will initially rent, thousands of recently delivered apartments act like incubators for future condominium buyers. As tech employment expands and restricted stock units vest, renters will increasingly target the mortgage interest deductions and potential for capital appreciation with homeownership. This bodes well for new condominiums in the approaching cycle.”
Van Damm says the challenge with high-rise construction, however, is that it takes three to four years to deliver product, so demand can rise much quicker than the supply. He notes several projects that planned to break ground over the past year deferred amidst the tepid market conditions. That delay only helps those projects that are currently underway.
It’s a similar story with apartments. After a yearlong trend of rising vacancy rates and lower rents, Zillow reported Seattle lease rates in June rose by 3.3 percent year-over-year and according to RealPage, a housing market data firm, the production of new apartments under construction is now trending downward by 19 percent. Many consumers took advantage of special lease-up opportunities, such as 6-8 weeks of rent concessions on a 12-month lease, but now they are finding fewer deals. That could mean the rental alternative, which crimped some demand for buying a condominium over the past year, is becoming less attractive and less available.
“Seattle rents spiked 50 percent since 2010, and after a brief reprieve last year, they are starting to climb yet again,” added Van Damm. “As these new apartment buildings fill up, the incentives will drop. I think we’ll see tighter vacancy ahead and higher rents, which will nudge more consumers to buy.”
With less than four months of resale supply (based on closed sales) downtown Seattle is technically a “neutral” market but buyers are encouraged by a market trifecta of sharper prices, lower rates, and more choice. For their part, sellers are more negotiable and special buyer bonuses are now being offered by developers in presales. In fact, more than 600 new condominiums have quietly presold since September 2018—that’s more than half of the new supply currently being offered and more absorption than 12 months of resale property closings in all of 2018. Only a small fraction of the new units being built are listed on the NWMLS, so new construction is not well represented in the data that drives the headlines.
“There’s a lot more going on than meets the eye, both domestically and internationally,” added Jones. “Seattle is viewed globally as the new West Coast gateway with a long runway for investments, especially when considering the 20 percent foreign buyer home taxes in Vancouver, BC and higher housing costs and state income taxes of California.”
Developers will move forward with new condominium supply, albeit at higher prices, given rising land and construction costs—the latter swelling 6-8 percent per year. With more tower cranes in Seattle than any other US city, experts don’t see labor or hard costs coming down any time soon. At the end of 2018, downtown Seattle was digesting $4.8 billion in construction projects dominated by 6.4 million sq. ft. of new office space, with a total of 15 million sq. ft. in the pipeline.
“Looking ahead, new high-rise condominiums will need to fetch more than $1,200 per sq. ft. on average—easily 10-15 percent more than the current crop of units being built today,” said Brian O’Connor, Principal of O’Connor Consulting Group – a leading appraiser that specializes in urban development. “If the presales aren’t there, then the project will defer or won’t get built. If we don’t add more supply, then the market will be unbalanced and prices will rise until they do pencil.”
To chase higher values, developers may also be less likely to presell all their homes, depending on their construction financing terms. Values are expanding and it’s not uncommon for prices to climb 15 to 25 percent from presale to resale, as was the case at Insignia Condominiums in Belltown during the last cycle. As more new construction closes, the median home prices will rise.
Ultimately, Seattle enjoys its enviable market fundamentals. The Brookings Institution coined Seattle as one of four “superstar cities” in the US, alongside New York, Chicago and San Francisco for displaying the nation’s greatest job density and growth rate. The opportunity for gainful employment with a lower overall cost of living (and inherent livability) compared to other West Coast gateway cities helps big business recruit and retain new residents to downtown Seattle. Demand for housing is expanding in lockstep, which supports the upward trajectory of home values into the next decade.